Key takeaways:
Current Price: $216 Price Target: $251 NEW (from $255)
Position Size: 2.26% 1-Year Performance: +18%
- Total company sales +5%, core beer demand remains elevated, Wine & Spirits finding its new growth level post-divestitures
- Overall demand for core beer brands is robust, supporting future growth of the portfolio
- Beer sales increased by 13.8% organically (volume +11.7%)
- Modelo Especial demand remains robust with +16% growth – remains #1 brand in high end beer market, and fastest market share gainer
- Wine & spirits grew +15% organically, driven by high end portfolio
- Hard seltzer: still an opportunity, but the management team is not relying on this category to drive growth – lots of consolidation in the space
- STZ working on different flavors, packaging (single serve in convenience stores for example), low-carb/low calories/functional offerings
- Supply chain issues:
- Some shipping delays due to severe weather: 2-3pts impact on shipping growth
- Inventory levels should return to normalized levels by FY22 Q4
- Beer operating margin was impacted by higher marketing expenses and SG&A in general
- One-time charge regarding hard seltzer inventory obsolescence ($0.25 EPS impact a 2-3% impact for the year) impacted gross margins 350bps
- Wine & spirits operating margin declined 15% y/y due to higher SG&A (marketing spend), but gross margin increased from 42% to 45.2%
- Remains on track to reach 30% operating margin by FY23 as portfolio reshaping is taking place (divested ‘cheap” wines, keep high end ones)
- Guidance for fiscal year 2022 EPS increased by $0.15 thanks to better beer performance – raise of guidance is due to good fundamental performance
- Beer net sales increased to 9-11% from 7-9%, and operating income growth 4-6% from 3-5%
- Beer margins to reach 39-40% in FY22
- Wine & Spirits to decline -22% to -24% (due to sale of business). Excluding divestment, sales would be +2% to +4%
- Higher share buybacks
- Valuation: while we lowered our PT slightly to account for supply chain issues lasting a bit longer than expected in FY22, we still believe there is long-term value to be made in this name. On a P/E basis, the stock trades at a discount vs. its historical P/E. Our DCF shows upside as well.
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