Constellation Brands (STZ) reported solid fiscal first-quarter earnings on Thursday before the opening bell. The wine, beer and liquor company reported net sales of $2.36 billion, up 17% year over year and above Wall Street expectations of $2.16 billion. On the bottom line, the company said it had adjusted earnings of $2.66 per share, an increase of 14% over the prior year and a beat on the $2.52 consensus. Excluding equity losses from Constellation’s stake in cannabis company Canopy, adjusted earnings came in at $2.90 per share. In addition to the headline numbers, adjusted operating income of $793 million was up 10% year over year and well above the $731 million consensus. Operating cash flow came in at $758.2 million, ahead of the $740 million estimate. Bottom line It was a solid print from Constellation Brands — one that speaks to the resilient nature of alcohol sales despite an economic worries. After all, when times get tough, folks turn to their vices. Despite what we believe to be strong underlying dynamics, shares are selling off today. This could be because some investors are selling STZ shares to raise cash for more beaten-down names. Shares of Constellation were down less than 4% year to date prior to the earnings report and remain a relative outperformer for the year. Another reason could be management’s reaffirmation of guidance rather than a raise, especially given the earnings beat this quarter. This may have spooked investors concerned about a deceleration through the year, with stronger-than-expected earnings now offsetting weaker results later. We believe, however, that sticking with the forecast is prudent considering all the macroeconomic uncertainties. There’s also the the premium investors will have to pay to convert B shares to A shares. This could be hard for some to stomach, but the one-time cash hit is more than offset by the benefits that come with a single voting class common stock structure (more on this later). Given the weakness is likely due to a one of these factors — or a combination of two or three —today’s price drop represent a buying opportunity for patient investors. Shares trade at just over 20 times management’s fiscal year 2023 earnings guidance and as noted time previously, alcohol sales tend to be more resilient during an uncertain or slowing economy. We look forward to learning more when CEO Bill Newlands speaks with Jim on Thursday’s edition of “Mad Money” at 6:00 p.m. ET. Elimination of Class B shares Constellation Brands said Thursday that its board approved — and will recommend to shareholders for approval — a proposal to eliminate the company’s Class B common stock, which is owned by the Sands family. Each Class B share will convert to an A share on a one-for-one basis, plus owners will receive $64.64 per share, or $1.5 billion. The package represents a 26.5% premium to STZ’s close on June 29. This premium is below the initial 35% the Sands family asked for in April, but above the 10% to 20% premium some analysts had anticipated. So it will cost Class A shareholders to convert the B shares. But it’s worth it for the long term. Eliminating the higher vote Class B common stock substantially reduces the voting control of the Sands family. This is so important because it means the Sands family can no longer push through unattractive deals that are not supported by shareholders like Ballast Point or Canopy Growth Corp (which has been awful and a money loser). The Sands family also can’t block a buyer for the company. We don’t invest in companies on an M & A basis, but it has crossed our minds that STZ could become a target now that the Sands family doesn’t have all this control. It also means Constellation could pay out more cash to shareholders through the dividend or buybacks. In addition, the stock should become more attractive to investors who prefer single voting class stocks and could lead to a higher price-to-earnings multiple on the stock in the future. Dual-class shares give the company founders an outsized amount of control, which can create problems from a corporate governance perspective. Constellation also pointed out some small operating cost savings and administrative savings from the proposed transaction. So while the $1.5 billion cash outlay and the 26.5% premium may be perceived as negative, we think this is a price worth paying to reduce the concentration of power and better align the interests of shareholders. Company results Beer sales of $1.9 billion, up 21% year over year, were better than expectations of $1.69 billion. Operating income on beer came in at $762.8, outpacing the $690 million consensus. Despite that outperformance, operating margin in the segment took a 260 basis point hit versus the year ago period, falling to 40.2%, as tailwinds from favorable pricing, foreign exchange dynamics, marketing and selling, general and administrative (SG & A) expenses were more than offset by higher raw material, transportation, brewery, and depreciation costs. Additionally, shipments to distributors were up 17.3% annually while depletions, which measure U.S. domestic distributor shipments of Constellation’s branded products to retail customers (based on third-party data) increased 8.7% versus the year ago period. On the release, management said Constellation was it was the top share gainer in the U.S. beer industry, with four of the top 15 growing high-end brands, noting that Modelo Especial remains the leader. Meanwhile, wine and Spirits front sales came in at $465 million, an increase of 2% year over year and ahead of the $41 million expected on Wall Street. Operating income of $91 million was a bit short versus the $106 million expected. Similar to what we saw in beer, the segment operating margin contracted 330 basis points to 19.6% as the tailwind of favorable mix and pricing was checked by higher raw material and transportation costs, as well as an increase in general and administrative expenses and a planned increase in marketing spend. Shipments were up 1.5% annually while depletions rose 1.2% versus the year ago period. On the release, management said The Prisoner Wine Company, High West Whiskey, and Casa Noble Tequila brands all grew “significantly ahead of their corresponding categories.” Guidance As noted above, management reiterated fiscal year 2023 segment sales and earnings guidance. Excluding Canopy, management anticipates consolidated earnings of $11.20 to $11.50 per share, firmly ahead of the expectations of $11.04 coming into the print. Assumed in this guidance are beer sales and operating income growth of 7% to 9% and 2% to 4%, respectively; plus a decline in wine and spirits sales of 1% to 3% that will be offset by operating income growth of 4% to 6%. On the cost side, relating to beer COGS (cost of goods sold) management anticipates ongoing headwinds from aluminum, cartons, wood pallets and steel price inflation, as well as higher logistics costs resulting from increased fuel prices and freight rates. Brewery costs are also expected to rise due to increased headcount and wage inflation. For wine and spirits, management expects to incrementally raise prices starting in the second fiscal quarter (the current quarter). On the call, the team added that “a strong New Zealand vintage coming online is projected to drive volume and enhanced margins, and finally, we expect to see benefits from our ongoing cost savings initiatives.” Additionally, operating cash flow is expected to come in at about $2.6 billion to $2.8 billion, in line with the $2.7 billion expected. Taking out capital expenditures of $1.3 billion to $1.4 billion and we get a free cash flow forecast of $1.3 billion to $1.4 billion, which at the midpoint is slightly below the $1.4 billion expected. (Jim Cramer’s Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico.
Susana Gonzalez | Bloomberg | Getty Images
Constellation Brands (STZ) reported solid fiscal first-quarter earnings on Thursday before the opening bell.
The wine, beer and liquor company reported net sales of $2.36 billion, up 17% year over year and above Wall Street expectations of $2.16 billion. On the bottom line, the company said it had adjusted earnings of $2.66 per share, an increase of 14% over the prior year and a beat on the $2.52 consensus.
