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Constellation Brands, Inc. (NYSE:STZ) reports preliminary financial results for the quarter ended 2012-08-31.

Constellation Brands Inc. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Constellation Brands, Inc.'s analysis versus peers uses the following peer set: Diageo PLC ADS (NYSE:DEO), Brown-Forman Corp. Cl B (NYSE:BF.B), Beam Inc (NYSE:BEAM), Luzhou Lao Jiao Co. Ltd. (000568-CN), Molson Coors Brewing Co. Cl B (NYSE:TAP), Remy Cointreau S.A. (OTC:REMYF), Shanxi Xinghuacun Fen Wine Factory Co. Ltd. (600809-CN), Compania Cervecerias Unidas S.A. ADS (NYSE:CCU), Treasury Wine Estates Ltd. (TWE) and Anhui Golden Seed Winery Co. Ltd. (600199-CN). The table below shows the preliminary results, along with the recent trend for revenues, net income and returns.

Quarterly (USD million)2012-08-312012-05-312012-02-292011-11-302011-08-31
Revenues698.5633.6626.1699.0690.2
Revenue Growth %10.21.2(10.4)1.38.6
Net Income124.672.0103.0104.8162.7
Net Income Growth %73.1(30.1)(1.7)(35.6)118.4
Net Margin %17.811.416.515.023.6
ROE % (Annualized)20.311.615.515.724.0
ROA % (Annualized)6.64.15.75.99.2

Valuation Drivers

Constellation Brands, Inc.'s current Price/Book of 2.5 is about median in its peer group. We classify Constellation Brands, Inc. as Challenged because of its below peer median returns (ROE of 15.2%, compared to the peer median ROE of 20.9%) and the market's low expectations of its growth (PE of 18.6, compared to peer median of 26.5).

The company employs relatively high amounts of assets (with a turnover of 0.4x, compared to peer median of 0.5x) while generating profit margins of 15.2% that are only about median among its chosen peers. Constellation Brands, Inc.'s net margin continues to trend downward, but is still within one standard deviation above its five-year average net margin of 2.4%.

Economic Moat

Changes in the company's annual top line and earnings (-20.2% and -20.5%, respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

Constellation Brands, Inc.'s return on assets is less than its peer median currently (5.4% vs. peer median 8.0%). It has also had less than peer median returns on assets over the past five years (1.0% vs. peer median 8.9%). This performance suggests that the company has persistent operating challenges relative to peers.

The company's comparatively low gross margins of 44.3% versus peer median of 57.3% suggests that it has a non-differentiated strategy, or is in a pricing constrained position. However, Constellation Brands, Inc.'s pre-tax margin of 15.2% is around the peer median which, when combined with the gross margin, suggests lower operating costs relative to peers.

Growth And Investment Strategy

Constellation Brands, Inc.'s revenues have grown more slowly than the peer median over the last few years (-10.2% vs. 3.1%, respectively, for the past three years), and the stock price's relatively low PE ratio of 18.6 implies relatively low future growth as well. Overall, we view the company's growth expectations as substandard relative to its peers.

Constellation Brands, Inc.'s annualized rate of change in capital of -2.9% over the past three years is less than its peer median of 3.9%. This below median investment level has also generated a less than peer median return on capital of 6.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly, and now may be in maintenance mode.

Earnings Quality

Constellation Brands, Inc.'s net income margin for the last 12 months is around the peer median (15.2% vs. peer median of 15.4%). This average margin and relatively conservative accrual policy (8.7% vs. peer median of 5.5%) suggests possible understatement of its reported net income.

Constellation Brands, Inc.'s accruals over the last 12 months are positive, suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Constellation Brands, Inc. is engaged in the production, marketing and distribution of beverage alcohol products. Its wine portfolio is complemented by select premium spirits brands and other select beverage alcohol products. The company's portfolio of brands comprises of Robert Mondavi, Hardys, Clos du Bois, Blackstone, Banrock Station, Arbor Mist, Estancia, Ravenswood, Jackson-Triggs, Kim Crawford, Corona Extra, Black Velvet Canadian Whisky and SVEDKA Vodka. Constellation Brands conducts its business through entities it wholly owns, as well as through a variety of joint ventures and other entities. The company was founded by Marvin Sands in 1945 and is headquartered in Victor, NY.

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Source: Earnings Analysis: Constellation Brands, Inc.