Barron's Toasts Constellation Brands -- Shares Should Climb 25%

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Time to Raise a Glass to Constellation by Jay Palmer

Summary: After dropping 30% (from $29 to $19) in January on an earnings warning, Constellation Brands Inc. (STZ) shares are back up at $23 on an accelerated $420 million stock buyback. The company's biggest problem has been a glut of Australian wine in the UK market, which prevented it from raising prices to offset cost increases. But analysts say the worst is over, thanks to a drought that promises to reduce this year's harvest by 30%. Other poorly-implemented changes (revamping of U.S. wine sales, expanded deal with Mexican brewer Grupo Modelo, and Svedka buyout) that hit Constellation's bottom line also seem to be on the mend, providing hope for a further profit boost. Analyst consensus is that sales and earnings will be down at least 20% this fiscal year (ending Feb. 2008), but they also forecast a 20% gain in profits for F2009. Wines account for 75% of the company's sales -- it is the #1 global premium winemaker, and third in value wines. CEO Richard Sands is happy to keep things that way; growth, and inflated profit margins, are found in the pricer wines. He sees 20% yearly growth in the $20/bottle market. Shares, now trading at just 13.5x F2009e earnings, could easily jump 25% over the next year.

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