Constellation Brands Moves Up On Strong Results
Like so many other investment stories in the market today, Constellation Brands (NYSE:STZ) is a multi-faceted one. On the one hand, we have a company that's working hard to optimize its portfolio and position for long-term growth while on the other we have one supported by secular trends and economic reopening. In both cases what we have is an undervalued cash-generating machine that’s set to return billions in capital to shareholders. If you like growth, improving margins, dividend growth, and share buybacks the stock could be for you.
Constellation Brands Growth Accelerates
Constellation Brands' fiscal Q1 Revenue is up 4% sequentially and 3.6% from last year to $2.03 billion and beat the consensus by 50 basis points. The gains were driven by Constellation Brands portfolio repositioning, a repositioning that is focusing on the higher growth higher-margin premium end of the adult beverage market. Sales of beer, wine, and spirits are all positive for the quarter with momentum building towards the end of the period as food away from home establishments reopened.
The company reported a gross margin rate of 54.3% which is up from last year and beat the consensus of 53% but the earnings fell short of the consensus. The GAAP EPS of - $4.74 missed by $4.43 while the adjusted $2.33 miss by only two pennies. GAAP EPS includes the cost of repositioning and recent acquisitions so aren’t exactly comparable to the consensus. More importantly, the company reports an improvement in cash flow and free cash flow that has allowed it to raise full-year guidance, accelerate share repurchases and continue paying its very safe dividend.
Along with the earnings report the company announced plans to repurchase roughly 2.2 million shares based on recent price action with 80% of that expected to happen in the current quarter. The dividend isn't large with a yield of 1.3% but it is very safe and is expected to grow. The company has been increasing the distribution regularly since its inception and the payout ratio is still a very low 30% of adjusted EPS. Based on this, the outlook for revenue growth, and the relatively strong balance sheet we expect to see another dividend increase this year.
Analyst Like Constellation Brands
The analysts like Constellation Brands and the sentiment has been trending higher over the past three months. Along with that is an increase in the consensus price target that assumes about a 5% upside to the current price action. The most recent analyst’s note came out two days before the earnings report and included a price target increase to $298. That assumes roughly 26% upside and is still $7 short of the high price target of $305. Bernstein, which holds the high price target, says investors should not avoid beer stocks and we agree.
The Technical Outlook: Constellation Brands Signals A Buy
Shares of Constellation Brands are up more than 2% in the wake of the earnings release and throwing off a buy signal. The price action has broken above the short-term moving average in tandem with bullish crossovers in both the MACD and the stochastic. In our view, this is a strong signal with room to run so investors should expect Constellation Brands to at least retest the recent highs.
A break above the $242 level would be very bullish and could lead to significantly more upside by the end of the year.
