Key takeaways:
Current Price: $224 Price Target: $255
Position Size: 2.74% 1-Year Performance: +41%
- Total company sales +3%
- Beer organic sales increased by 18% – off-premise consumption helps offset weak on-premise drinking
- wine & spirits grew +8% organically
- Sales, margins and EPS came above consensus
- Beer margin impacted by higher advertising and marketing spending
- total operating margin impacted by 900bps due to wildfires and increased marketing spending
- New guidance for fiscal year 2022 introduced – disappointing on the margin and share buyback front
- CEO quote: “One of the things that we’ve been quite good at over the last several years is running our plants at hyper efficiency. But I think one thing as learning from the pandemic. And I think any good business should have a element of learning when something hits you in the face. In the pandemic certainly did that across many, many, many industries. One of the things we learned is while our efficiency was tremendous. We didn’t have a lot of flexibility in the event that something didn’t go well and so one of the pieces that we are doing with this expansion is not only to meet the hyper growth that we have within our business, but also to create an increasing flexibility in some redundancy within our business.”
While Q4 results were good, guidance for FY2022 is below expectations, sending the stock price lower today. We think the management team remains prudent as it is stepping up its marketing efforts (new product launch – Corona Seltzer Limonada, new variety pack…), and increasing spending in capex to expand its production capacity in Mexico. For FY22, beer sales are expected to be +7% to +9% (in line with historical average), but beer operating income growth of only 3-5% shows some margin pressure. Inflation is back, with raw materials (such as glass), transportation and labor costs expected to rise.
Wine & Spirits sales are expected to grow +2% to +4% organically following the divestment of lower-end brands – we are finally seeing growth in that segment, driven by premium brands. The company needs to increase its capex spending to increase its capacity at its current Mexican plant, following the Mexicali fall-out with the local government. It is still unclear of STZ will be able to recover its investment in that plant, and the company is taking an impairment charge of ~$660M next quarter. This will limit potential for share buyback this coming year, which was highly anticipated.
Following disruption in its production capacity/supply chain due to Covid, STZ’s management team is looking at expanding its production capacity with some redundancies, in order to avoid future disruptions and increase flexibility.
Overall we still see long-term opportunity for growth in this name (including cannabis), and believe it is a good name to hold in staples.
Investment Thesis:
- STZ helps position our portfolio to be more defensive at this stage of the economic cycle
- Management team focused on high quality brands and innovation
- STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
- STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
- Growth optionality from cannabis investment
[tag STZ] [category earnings]
$STZ.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109