Constellation Brands: Wine, Beer & Cannabis Drinks?

10/21/2019 5:00 am EST

Focus: CONSUMER

John Staszak

Securities Analyst: Consumer Discretionary & Consumer Staples, Argus Research Corporation

Constellation Brands (STZ) is a global manufacturer and marketer of wine, spirits, and beer with a wide range of brands, including Clos du Bois, Ruffino, Robert Mondavi, and SVEDKA vodka, notes John Staszak, an analyst with the independent research firm, Argus Research.

As the largest wine company in the world and the third-largest beer company in the U.S., Constellation should continue to benefit from economies of scale. The company also owns the rights to brew and market Modelo Mexican beers (including Corona) in the United States.

We have a positive view of the recent additions to Constellation’s brand portfolio and increased share of the U.S. beer market, as well as of its above-average margins.

Constellation’s results over the past decade reflect several key industry trends, including faster U.S. sales growth for premium beer (imported and “craft”) than domestic beer; an increase in global wine consumption, which has favored the sale of more expensive wines; strong sales of premium spirits; and the consolidation of suppliers, wholesalers and retailers.

Constellation has a record of growth. Over the past eight years, the company has posted compound annual revenue growth of 7%, operating income growth of 25%, and EPS growth of 20%. This growth has been driven by the launch of new brands as well as by changes in the business portfolio.

In April 2016, Constellation completed the $285 million acquisition of Prisoner Wine Company brands, a seller of premium wines. Prisoner Wine’s volume has grown 30% over the last three years.

In fiscal 3Q17, the company acquired High West Distillery for $160 million. High West’s brand portfolio includes American straight whiskeys and other spirits. The High West acquisition has enabled Constellation to enter the lucrative market for premium craft whiskey.

In October 2017, Constellation raised it interest in Canopy Growth Corp. (WEED), a marijuana company based in Canada, to 36% from 9.9%.

Constellation is partnering with Canopy to develop a drinkable marijuana product. It hopes to sell the drink in Canada in 2019, when marijuana is expected to be legalized for recreational use. The company does not currently plan to sell any Canopy products in the U.S.

STZ is trading at 21.4-times our FY20 estimate, above the 10-year historical average of 18 and the average of 17 for other growing Consumer Staples companies.

However, we believe that a higher multiple is warranted based on the company’s prospects for above-peer-average growth, margin improvement, and rising ROE. Our target price of $230 implies a multiple of 25.3-times our FY20 estimate.

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