DOI: 10.25346/s6/zo0lpt
title: CONSTELLATION BRANDS

description: Description Thesis Buy a conservatively financed, US consumer staples company that is growing volumes at 12x forward EPS and 10x calendar 2027 EPS. The stock is trading at a five-year low. Description This idea has been written up several times, including by Wst2398 two years ago. Since then, volumes and profits are up, while stock price is down 20%. Constellation brands is primarily a beer company (more than 90% of EBIT) that produces and sells Modelo, Corona and Pacifico beers. The company has been growing volumes at 3-5% per annum over the past several years and should benefit from growing number of Hispanic consumers in the US as well as their lower average age than the general population. Industry characteristics The beer industry is a very good business, characterized by high returns on capital and generally rational competition. Neither suppliers nor customers have any power. While industry volumes have been declining slightly, the consumers have been switching to high priced beer. The biggest player is Inbev with around 43% market share, Molson Coors with around 26%, Constellation with around 20%, Boston Beer around 5%, Heineken around 4%, Diageo around 2%, and Yuengling around 1-2%. Inbev and Molson Coors have been losing market share and Constellation has been taking market share. Operating performance FY 2020 (ended 02/29/2020) 3% reported and 3% organic revenue growth to $8.344bn, adjusted EBIT down 3% to $2.544bn, adjusted EPS = $9.12 or $9.89 excluding Canopy. Reported EPS = a loss of $0.07. Reported results were hurt by $2.1bn decrease in fair value of Canopy investments. Beer volumes up 6.1% to 311.9MM (24 pack, 12-ounce equivalents) on a shipment basis and 7.5% depletion increase. Segment revenue up 8.0% to $5.6159bn, segment EBIT up 10.0% to $2.2479bn. Wine and spirits – shipment volumes down 8.4% on a reported and 7.3% on an organic basis to 53.6MM 9-liter cases. Depletion volumes down 5.2%. Sales down 6.4% to $2.7276bn on a reported and 5.6% on an organic basis. Segment EBIT down 8.1% to $708.4MM. FY 2021 (ended 02/28/2021) 3% reported and 3% organic revenue growth to $8.615bn, EBIT on an adjusted basis up 9% to $2.773bn. EPS = $10.23, adjusted = $9.97, excluding Canopy ajudsted up 6% to $10.44 Sold part of Wine and Spirits business that did 22.3MM 9-liter case in volume in FY 2020 and did $875MM in revenues in FY 2020. Beer segment saw: 7.3% reported and 8.1% organic shipment volume growth, 7.1% depletion growth. Shipment volumes = 334.6MM 24-pack 12-ounce case equivalents. Sales up 8% and 10% on an organic basis to $6.0746bn, segment income = $2.4943bn up 11%. Operating margin rose to 41.1% from 40.0% driven by decline in marketing and SG and A as a % of sales, pricing, the Ballast Point divestiture, and forex, partially offset by increased COGS and unfavorable mix. Wine and spirits – 16.0% reported and 4.9% organic volume decline in shipments, 2.8% decline in depletions, sales down 7% to $2.5403bn and up 2% on an organic basis, segment operating income down 12% to $622.4MM FY 2022 (ended 02/28/2022) Revenues up 2% to $8.821bn, EBIT up 1% to $2.789bn, EPS = $0.22, and $10.20 on an adjusted basis and $10.99 excluding Canopy. The reported results were also hurt by a $666MM impairment on the Mexicali brewery due to political issues in Mexico. Canopy investment was written down by $1.645bn during the year. The Beer business saw 8.8% increase in shipments to 364.2MM units (24 pack 12-ounce case equivalents) and 8.9% increase in depletions (8% when adjusted for 2 extra selling days). Net sales up 11% to $6.7516bn, segment EBIT up 8% to $2.7033bn. Market share up 120 basis points. EBIT margin fell to 40.0% as benefits from favorable pricing, marketing as % of net sales, and mix were more than offset by increased COGS driven by obsolescence, higher brewery and material costs, and increased depreciation. Wine and spirits – 33.6% decline in shipments to 29.9MM 9-liter cases, and 2.7% decline in shipments on an organic basis. 5.8% decline in depletions. Net sales down 19% to $2.0691bn and organic revenues up 9%, segment EBIT down 24% to $470.7MM. FY 2023 (ended 02/28/2023) Revenue up 7% to $9.453bn, operating income up 22% on a reported basis to $2.843bn and 3% on an adjusted basis to $3.037bn, net income was a loss of $71MM, adjusted net income up 1% to $1.982bn. EBIT up 4% to $2.908bn. EPS = a loss of $0.11, up 4% to $10.65 on an adjusted basis, and up 4% to $11.40 excluding Canopy. Canopy associated losses and write-downs were $2bn. The beer business: 6.9% shipment growth to 389.2MM units, 7.5% increase in depletions, net sales up 11% to $7.465bn, and segment EBIT = $2.8615bn, up 6%. EBIT margin fell 170 basis points to 38.3% as benefits from favorable pricing were more than offset by increased COGS, SG and A and marketing costs. Wine and spirits: 9.4% decline in shipments to 27.9MM 9-liter cases, 7.8% decline in shipments on an organic basis, 3.0% decline in depletions, 4% drop in net sales to $1.9876bn, 2% decline in organic net sales, and 4% drop in segment EBIT to $453.1MM. FY 2024 (ended 02/29/2024) Revenue up 5% on a reported and comparable basis to $9.962bn, segment income up 11% to $3.17bn and 7% on a comparable basis to $3.246bn. Net income = $1.727bn and $2.219bn on a comparable basis. Adjusted EBIT up 10% to 3.212bn on a comparable basis and $2.658bn on a reported basis. EPS = $9.39, $12.06 on a comparable basis and $12.38 excluding Canopy. Share of Canopy’s losses = $321.3MM. The beer business: shipments up 7.4% to 418.1MM 24-pack 12-ounce case equivalents. Depletions up 7.5%, net sales up 9% to $8.1626bn, segment EBIT = $3.0944bn up 8%. Modelo Especial became the #1 beer brand in dollar sales. EBIT margin fell 40 basis points to 37.9% as benefits from cost savings initiatives, favorable pricing, and reduced marketing as a % of net sales were more than offset by increased packaging and raw material costs. Is Apple a good investment? Apple Cost of Equity Apple Cost of Debt How to Invest in OpenAI How to Invest in SpaceX Wine and spirits: 12.2% decline in shipments to 23.8MM 9-liter case equivalents, 10.2% decline on an organic basis, 7.1% drop in depletions, 9% drop in net sales to $1.7992bn, 8% organic decline in net sales, 12% decline in segment EBIT to $398.7MM. First nine months of FY 2025 First nine months of the FY 2025: 3% increase in net sales to $8.0445bn. Beer business: net sales up 6% to $6.8354bn, segment operating income up 10% to 2.7706bn, segment EBIT margin up 170 basis points to 40.5%. Shipments up 4.6%, depletions up 3.9%. Wine and spirits – 11% revenue drop, 22% decline in segment operating income to $225.4MM. Sipments down 10.5%, depletions down 11.6%. Q3 FY 2025: Flat revenues at $2.464bn, segment income - $793MM, flat, $802MM on a comparable basis, down 2%, net income = $616MM up 21% on a reported basis, and $591MM on a comparable basis, down 1%. Adjusted EBIT down 2% to $826MM on a comparable basis. Comparable EPS flat at $3.25. Beer business: 1.6% increase in shipments to 102.7MM 24-pack 12-ounce case equivalents. 3.2% increase in depletions. Net sales up 3% to $2.0324bn, segment income up 2% to $769.9MM. EBIT margin fell 60 basis points to 37.9% primarily due to higher marketing spend and increased depreciation expense, partially offset by favorable pricing. Wine and spirits: shipments down 164% to 5.1MM 9-liter cases, 4.3% decline in depletions, net sales down 14% to $431.4MM, and segment income = $95.2MM, down 25%. Free cash flow The company has been spending a lot of money on capital expenditures to expand capacity in Mexico. This very heavy cap ex cycle should be behind it post FY 2025 (ends in six weeks) and on a going forward basis, cap ex should be around $100-$150MM per annum more than depreciation. Valuation The company is selling at $182 per share (Friday’s close) or roughly 12x forward EPS. The company is trading at 10x calendar 2027 EPS estimates. I think that this is extremely low for a business of this quality in the US, that is growing volumes in both absolute terms and relative to interest rates (TIPS are paying inflation + 2.5%). Molson Coors is trading at 8.8x 2025 EPS and 8.2x 2027 EPS, but it has been seeing significant volume declines. Inbev is trading at 13.2x 2025 EPS estimates and 10.3x 2027 EPS estimates. Inbev has seen zero organic volume growth over the past several years. Capital structure This is a conservatively financed business with debt less than three times EBIT and 2.75x EBITDA. Capital allocation Capital allocation has historically been lousy. Canopy acquisition + Ballast Point are two good examples. Nancy Pelosi Stock Portfolio Nancy Pelosi Stock Trades Nancy Pelosi Insider Trading Is Apple undervalued? Is Apple a buy? The company seems to have learned its lesson and is now buying back shares and paying dividends rather than engage in acquisitions. Risks – how do we lose money here GLP-1 permanently shifts demand down. Cancer labels on alcohol decrease consumption. Tariffs on Mexican imports – forces the company to either hike prices, absorb higher costs or move production to the US or a combination of all the three. .