STZ 3Q FY20 earnings summary

Key takeaways:

Current Price: $192 Price Target: $226
Position Size: 2.70% 1-Year Performance: +11.5%

Constellation Brands published their 3Q FY20 earnings this morning. Beer sales continue to shine (+8.3%) while margins expanded +200bps (a combination of pricing and lower COGS). The premium wine business is doing well, up 9%, although this number remains muted by the sales decline of the <$11/bottle wine brands that are in the process of being divested. Innovation and premiumization is the focus of the new CEO. As proof, the company is already taking orders from distributors for their upcoming launch of Corona Seltzer in the Spring. Their internal research showed that the Seltzer category is taking shares from beer (premium domestic & craft but not from imported beer), wine and spirit categories. They think the seltzer category can grow 2-3X from where it is today. Regarding the Canadian cannabis market, STZ remains bullish, with increased conversion of the illicit market to legal one (23% legal purchase in 2018 vs. 50% in 2019). Overall this was a good quarter, but we look forward to a “cleaner portfolio” once the lower priced wine & spirit brands are divested (with cash proceeds used to repay debt), as well as new innovations on the cannabis/drinks front.

Investment Thesis:
• Adding STZ helps position our portfolio to be more defensive at this stage of the economic cycle
• STZ is down ~20% YTD, giving us a good entry point
• 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

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Julie S. Praline
Director, Equity Analyst

Direct: 617.226.0025
Fax: 617.523.8118

Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109

www.crestwoodadvisors.com