On Monday, Wells Fargo updated its outlook on Constellation Brands (NYSE:STZ), increasing the stock's price target to $295 from $285, while reaffirming its Overweight rating.
The firm's assessment highlights a strong purchasing opportunity for STZ shares, noting that the stock is trading at a 12-year low relative to the Consumer Staples Select Sector SPDR Fund (XLP), despite clear short-term visibility and expected superior mid-term earnings per share (EPS) growth.
The analyst pointed out that despite concerns about the fiscal fourth quarter of 2024 due to January's weather conditions, there is confidence in the company's performance. The robust top-line of the Beer division and expected margin improvements, along with the Wine and Spirits (W&S) division entering a phase of "less harm," contribute to the positive outlook.
The firm anticipates that STZ will soon provide guidance on its new earnings growth algorithm for fiscal year 2025, which includes low double-digit EPS growth.
The report further elaborates that Constellation Brands is set to deliver stronger growth compared to the broader Staples sector in the coming years, with estimated growth rates in calendar years 2024 and 2025 outpacing those in the Food, Home and Personal Care (HPC), and non-alcoholic Beverage sectors.
The analysis also counters the skepticism over depletion rates affected by January's weather, suggesting that the actual depletion rates are in line with or even better than expectations.
Constellation Brands' ability to guide towards a low double-digit EPS growth algorithm for fiscal year 2025 is underscored by a consistent history of depletion rates and recent Nielsen data that shows resilience despite challenging weather conditions.
Moreover, the report mentions that while the Beer division's gross margin in the fiscal fourth quarter of 2024 is projected to be lower than in the fiscal fourth quarter of 2021, easing costs are likely to provide flexibility.
The revised stock price target of $295 is based on a 20-times multiple of the estimated calendar year 2025 EPS, compared to the 19-times multiple previously used. This valuation is justified by historical averages and the unchanged earnings projections for fiscal years 2024 and 2025, excluding Canopy Growth Corporation (NASDAQ:CGC) contributions.
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