Constellation Brands Is Doing All The Right Things

| About: Constellation Brands, (STZ)


By buying up smaller craft breweries, the company is taking advantage of the current trend for long term gain.

The excellent results that led to yesterday's nice 4% pop show the company's strategy is paying off.

There is no other large company selling alcoholic beverages growing at a faster rate.

Constellation Brands (NYSE:STZ) has been getting a lot of attention for their nice earnings beat and subsequent bounce of the stock yesterday of over 4%. The company sells the famous Corona and Modelo beer brands among many others and is experiencing a rapid growth in demand in America for its products. In fact, the company is growing so fast that they just announced they will be building a new $1.5 billion brewery in Mexico in order to keep pace with American demand. But it's not just the popularity of its flagship beers that is driving growth.

The company is shrewdly taking advantage of the huge craft beer craze by buying up smaller fast growing craft breweries in a race to acquire as many high quality ones as it can before the likes of Anheuser Busch and other giant beer companies beat them to it. In November, STZ acquired craft beer specialist Ballast Point Brewing & Spirits for a cool $1 billion. That may seem like a lot to pay for a single brewery based in San Diego, but STZ clearly understands the value of these companies as consumer tastes are shifting toward new beer flavors and away from the traditional brands owned by the biggest companies like Budweiser that are seen by some consumers as being evil faceless corporations offering watered down low quality beer.

But the Ballast acquisition wasn't just a smart move that looks to the future of the beer market; the $1 billion dollar price tag doesn't look all that expensive when you consider that the company had sales of $115 million last year and is growing rapidly. Even though that figure is revenue and not actual earnings, it represents over 10% of the total purchase price of the business so it looks like it won't take all that long for STZ to recoup its investment and once it does all future earnings will represent an infinite return on investment. This shows that the company is thinking very long term and is not satisfied to sit on its laurels simply enjoying its already very successful flagship brands that are growing rapidly in popularity themselves. This is the type of management investors want in a company.

STZ currently has a P/E of 32 and at current growth rates is projected to see that multiple decrease over the next few years to only 21 by 2018. And to show you just how much STZ is outperforming the industry, this table is very clear. Due to both its acquisitions and sales of its over 50 brands of beer, the company more than doubled its revenue over the past year while the rest of the industry showed either modest growth or in some cases declines in their stock prices. With 5 year average earnings growth of 12.37%, the company is clearly outperforming the industry average of only 9% and if management continues doing what it's been doing, this outperformance could be even more lopsided in the future.

While STZ doesn't offer a dividend like many other beer & spirits companies, there is also no other large cap business in the sector growing as rapidly as STZ so I wouldn't worry too much about cash flow when they are doubling revenues and acquiring billion dollar businesses in a trending industry. Especially in a year like 2016 where markets have been in turmoil since the start and there is so much uncertainty in the market, this is the rare company that offers growth and doesn't look wildly overpriced. The stock went up 4% yesterday as the indexes dropped triple digits and you can expect this to continue throughout the year if current performance by the firm's management continues and there is no reason to believe that it will not.

Disclosure: I am/we are long STZ.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Beverages - Wineries & Distillers
Problem with this article? Please tell us. Disagree with this article? .