Constellation Brands: Corona On Draft Will Tap Profits

Apr. 1.14 | About: Constellation Brands, (STZ)


Constellation Brands rolling out Corona Light draft beer nationally.

Strong initial cross promotion of beer brands with wine & spirits brands.

Full ownership of Crown Imports boosting sales and also operating margins.

Current draft sales of 2% expected to hit 10% over time.

Shares of Constellation Brands (NYSE:STZ) have enjoyed quite the ride. The company saw its stock price gain 87% in 2013. Shares have now hit new all-time highs with an impressive 20% run-up in 2014. Despite this huge total return over the last 15 months, shares remain undervalued with the upcoming catalyst of Corona Light and Corona Extra being expanded as a draft beer, and the integration of the Crown Imports acquisition.

If you listened or read the Constellation Brands third quarter earnings call, you would have noticed some information on the potential sales from draft beer and the current state of the rollout. An analyst asked if Corona was in test markets and when it would go national. The response from Constellation was, "It's rolling out as we speak." When asked about the potential of draft sales, Constellation's management responded with:

I would say that there's no reason to think that draft can't get to 10% of our business over time.

For comparison sake, draft currently represents 2% of Constellation's current beer sales. The industry average is 10%, and Constellation believes it can achieve the same number. The big question is whether putting Corona on draft will increase total sales or merely shift customers from the bottle to draft beer. The company implied during the earnings call that there is strong demand from bars for Corona on draft and that it is one of the most requested brands. With that being said, I believe sales at Constellation will rise dramatically as customers will now have the option to drink Corona from draft.

Third quarter draft beer depletions grew 30%, led by the expansion of the Victoria brand. Currently, Constellation's largest draft brands are Pacifico and Modelo Especial. In the third quarter, Modelo Especial draft grew 30%. Corona Light was expanded to 35 U.S. markets in March, according to CNBC. The national rollout continues and will see the brand readily available at bars in time for summer and the Cinco de Mayo holiday. Corona Extra remains in three test markets as a draft beer brand, and with strong demand, should see additional rollout locations soon.

Some customers prefer beer in a bottle, but I would venture to say the majority of customers dining at restaurants and bars prefer ordering a draft beer. The opportunities from having brands on draft also expands beyond the bar. The big opportunity I see is sporting events. Some stadiums do not carry bottles, especially those made of glass due to safety concerns. If Corona can gain entry into sports stadiums and arenas, it should see strong market share increases in that segment.

Corona Light is the third largest brand in the Crown Imports portfolio, but has the potential to become number one. It is the number one imported beer in the United States and remains the number five overall beer in the country. Sales of the brand increased 2.9% in 2013, which marked the 18th time in the last 19 years that the brand increased its sales.

The other continuing catalyst for Constellation Brands is its acquisition of Crown Imports, or more importantly, the portion it did not already own. With 100% ownership, Constellation is now working on integrating all the brands and growing them through cross-promotional activities and the draft business. In the third quarter, Constellation Brands said it was already working on leveraging cross-promotional activities between Corona and SVEDKA and Corona and Woodbridge. Corona and SVEDKA teamed up to create the Coronation Cocktail, a beer cocktail. Corona Extra and Woodbridge teamed up with Butterball for a Thanksgiving promotion, leveraging the strengths of Constellation's beer and wine brands.

Back in June of 2013, the acquisition of Crown Imports was completed. The price of $4.75 billion gave Constellation full ownership of Crown Imports, which includes brands like Corona, Modelo, Negra Modelo, Pacifico, Tsingtao, and Victoria. Investors who have followed the acquisition trail have seen strong gains along the way. In June of 2012, I recommended buying shares of Constellation as a back door play on AB InBev's (NYSE:BUD) Modelo buyout. Since that article, shares have increased 281%. I also recommended buying shares in October of 2012, as I believed the Crown Imports acquisition was being undervalued by investors. Since that time, shares of Constellation are up 129%.

The acquisition was echoed with "Today begins a new chapter in Constellation's history." That could not be more true, as Constellation now has full ownership of 6 of the top 20 imported beers in the United States.

In the third quarter, Constellation Brands saw impressive growth. Crown Imports saw sales increase 21%, led by Modelo Especial (+18%) and Corona Extra (+6%). Aside from beer, Constellation Brands saw wine sales grow 3% and spirits sales decline 5%. SVEDKA, the company's key vodka brand, saw market share increase with a boost from new flavors. SVEDKA continues to introduce new flavors like strawberry lemonade, mango pineapple, new black velvet, and cinnamon rush.

Third quarter earnings per share were $1.10. Total sales saw $662 million in incremental net sales from the Crown Imports acquisition. Total beer sales increased 21% for the third quarter. Gross margin increased to 42.4%, from 41% in the prior year. Beer operating margin increased to 32%, from the prior year's 30%. These margin increases should continue, as the result of full ownership of Crown Imports. Constellation Brands is able to enjoy all the profits and improve its margins along the way.

For the full year, Constellation Brands now expects earnings per share to hit $3.10 to $3.20. The prior estimate from the company was a range of $2.80 to $3.10. Total net sales are expected to increase in the high single digits. Constellation Brands will report fourth quarter and full year earnings on April 9th and could see the stock increase again if it can beat guidance, post higher margins, and update on the rollout of the brands on draft.

Constellation Brands has a great portfolio of beer, wine, and spirits brands. As the Crown Imports acquisition is paid off, I expect the company to make a series of additional deals to grow its portfolio. Until that time, the company will see strong growth from the introduction of Corona Light and Corona Extra on draft, and the 100% ownership of Crown Imports.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.