Constellation Brands: Outlook Leaves Shareholders With A Hangover

| About: Constellation Brands, (STZ)

Shares of wine producer Constellation Brands (STZ) fell 12.5% on Thursday after the outlook for its fiscal year of 2013 came in below analyst expectations.

Fourth Quarter Results

The company reported fourth quarter revenues of $628 million, down 12% on the year. Net income fell 63% to $103 million, or $0.51 per share. Sales fell primarily due to the divestment of the Australian and UK's wine business. Earnings did slightly beat expectations on a favorable outcome of some tax items, which led to a negative tax rate.

"We believe our marketplace momentum positions us to grow in-line with the US wine and spirits category in fiscal 2013," according to CEO Sands. EBIT growth for 2013 will stay behind revenue growth on increased sales and brand investments. For 2013 Constellation expects to earn $1.93-$2.03 per share vs. $2.34 for the entire year of 2012.

Share Repurchase

Constellation's board of directors have authorized a new $1 billion repurchase program after repurchasing for about $400 million in shares over the fiscal year of 2012. At a current share price of low twenties the company is on track to reduce its number of shares outstanding towards 185-190 million by the end of 2012.


Constellation holds about $80 million in cash according to its latest quarterly report and about $2.4 billion in debt. Its current market value of $4.3 billion values the wine producer at 1.6 times annual revenue and 10 times annual earnings. Despite generally favorable industry conditions, revenues are still down significantly over the last couple of years as the company has divested some of its business. Margins have peaked in 2011 and 2012 at a record level of 17% and will come down in its fiscal year of 2013 due to increased brand building efforts.

Investment Thesis

Shareholders of Constellation Brands saw shares peaking at $30 in 2005, but from that point in time have seen shares on the demise. The constant transformation of the business and low underlying revenue growth have left few triggers to drive share prices higher despite a generally favorable valuation.

The new $1 billion share repurchase program is a strong sign that the company has engaged in a very friendly shareholder strategy as it is willing to retire about a fifth of its outstanding shares at a reasonable valuation. For 2013 the company will see a decline in earnings per share due to the business transformation and increased brand investments. The increased repurchase program cannot entirely offset the negative impacts of the transformation and increased investments.

While there might be valuation drivers on the way by the end of the year, its is too early to trigger any strong recovery any time soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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