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Constellation Brands Ahead of Industry: What's Driving It?

Zacks Equity Research

Shares of Constellation Brands, Inc. STZ are riding high on sturdy brand portfolio, strategic endeavors, solid first-quarter fiscal 2018 results and impressive earnings history.

This Zacks Rank #2 (Buy) company has outpaced both the Zacks categorized Beverages – Alcoholic industry and the broader sector in the last six months. The stock has rallied 31.5%, comfortably outperforming the industry’s advance of 9.9%, which is currently placed at top 10% of the Zacks Classified industries (25 out of 256). Meanwhile, the Zacks categorized Consumer Staples sector gained 9% and is placed at top 13% of the Zacks Classified sectors (2 out of 16).  

Growth Strategies

Armed with a formidable portfolio of well-known brands, Constellation Brands holds a dominant position in the premium wine and beer segment in the U.S. The company is also a leading producer of wine in Canada and New Zealand. This provides it with a competitive edge and also bolsters its well-established position in the market. In addition, its consistent focus on brand building and initiatives to include new products are the key revenue drivers.

Owing to its strategic efforts, the company is witnessing robust depletion trends and increasing market share, especially in the U.S. beer category. Notably, Constellation Brands was the highest growth contributor in this category for the fourth straight year in fiscal 2017.

Furthermore, management is focused on expanding in the craft beer space, which has become a solid growth avenue in the beer space. Constellation Brands is making meaningful leadership changes in an attempt to improve its operational activities too. In fact, its focus on enhancing points of distribution at retail and effectively executing its strategic merchandising initiatives to boost sales is encouraging.

Meanwhile, Constellation Brands’ focus on expanding operations to achieve business growth is noteworthy as its results continued to gain from the recent buyouts. Currently, the company is on track with the Nava brewery and glass plant expansion, while it enhanced its wine portfolio with the buyout of Schrader Cellars. Additionally, the acquisition of Obregon Brewery is likely to bolster its high-end Mexican beer portfolio, going forward.

Splendid Q1 Results & Outlook

Constellation Brands showcased another sterling performance in first-quarter fiscal 2018, marking its 16th straight quarter of earnings growth year over year and 11th straight positive surprise. While sales missed estimates after six straight quarters of beat, it improved year over year. Results gained from its efforts to drive consumer demand and contributions from acquisitions, along with continued strength in the company’s beer business in particular. Moreover, lower cost of goods sold in the quarter improved pricing and volumes boosted margins. In fact, the company has delivered gross and operating margin growth in the trailing four quarters.

Apart from these factors, confidence in its beer business encouraged management to raise its adjusted earnings guidance for fiscal 2018. Constellation Brands now envisions adjusted earnings in the range of $7.90–$8.10 per share versus $7.70–$8.00, guided earlier. Notably, the encouraging outlook has also perked up the earnings estimates in the last 30 days. The Zacks Consensus Estimate of $8.13 and $9.14 for fiscal 2018 and fiscal 2019 has climbed 14 cents and 19 cents, respectively.

Bottom Line

Though the recent sale of the Canadian wine business led Constellation Brands to post lower-than-expected sales, effective integration and growth of its recently acquired brands make us optimistic about the company’s ability to sustain momentum. Also, it has an impressive long-term earnings growth rate of 18.2%.

Meanwhile, you may also count upon some other top-ranked stocks such as Craft Brew Alliance, Inc. BREW, Energizer Holdings, Inc. ENR and Ambev S.A. ABEV.

Craft Brew Alliance has delivered positive earnings surprise of 50% in the last reported quarters and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Energizer Holdings, a Zacks Rank #1 stock, has pulled off an average positive earnings surprise of 21.6% in the trailing four quarters. Also, it has a long-term earnings growth rate of 10.1%.

Ambev carries a Zacks Rank #2 and has a long-term earnings growth rate of 5.9%.

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