Constellation Brands CEO addresses 2 main investor concerns after Corona beer maker's earnings

Published Thu, Jun 30 20227:10 PM EDTUpdated Thu, Jun 30 20227:14 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

In an interview with Jim Cramer, the CEO of Constellation Brands (STZ) addressed two concerns that some investors had Thursday following the company's quarterly results . Why did the maker of Corona and Modelo beer only reaffirm its full-year guidance despite beating Wall Street estimates for first quarter sales and earnings? Could Constellation have reached a more favorable deal with the Sands family to convert their Class B shares into Class A shares, instead of the roughly 26.5% premium to which Constellation ultimately agreed? We believe those two developments likely played a role in how Constellation shares performed Thursday, falling 4.34% to close at roughly $233 each, despite the top-and-bottom line beats. For that reason, we were especially interested in what CEO Bill Newlands had to say on the matters. Unchanged guidance Constellation, a Club name, beat fiscal first-quarter estimates on earnings and revenue, which may have prompted some investors to expect the company to raise its fiscal 2023 guidance for metrics such as segment sales growth, free cash flow and per-share earnings on a comparable basis. In reality, Constellation reiterated its previously stated targets. Newlands explained why on "Mad Money." "I think you should be very excited about our depletion rate for the first quarter," Newlands said, referring to the important beverage-industry metric that measures cases that distributors sell to retailers. "I'm a big believer in delivering what you promise. We delivered a very strong quarter, with depletions, particularly in our beer business, up almost 9%. When you look at the future potential of that business, we have a lot of areas of strength, and I think it's important to look at that against depletions. The depletion scenario is continuing to look very solid in that business, and I think investors need to be very focused on that." "Admittedly," he continued, "we're only one quarter in. I think it's always dangerous to overpromise too early in the year, when you're in an era of unprecedented volatility. But we're very confident, and we're very comfortable, with the start that we had to our year." Class B share conversion When the Club started a position in Constellation in May, we noted we were pleased to see a proposal on the table to end Constellation Brands' dual-class common stock structure. On Thursday, Constellation said its board of directors has signed off on a plan to do so , and it's recommending shareholders approve it. The Class B shares owned by members of the founding Sands family will be converted into Class A shares along with a cash consideration for each share that, in total, represents a 26.5% premium to where the common stock closed Wednesday. The transaction is valued at $1.5 billion. While some on the Street expected the premium to be between as 10% to 20%, Newlands said he believes the actual deal that was reached is appropriate when considering the benefits of a simplified governance structure: "If you look at the deal that was struck, yes it was a 26% premium. However, that is lower than precedent transactions. And we also, with [Robert and Richard Sands retiring as executive chairman and executive vice chairman, respectively], we are saving between $15 [million] and $20 million annually in terms of salary and benefits. If you run that with our P/E ratio [of nearly 21 times], that's roughly a $300 million benefit to the organization and if you net that against what they will receive, that puts the premium in the low 20s%. I think personally it's a very good scenario. And with the governance cleanup that occurred as part of it, as well, we're much well positioned to be a much more traditional company going forward, and I think that's in the interest of all shareholders." Robert Sands will become the board's non-executive chairman, and Richard Sands will still serve as a member of the board. Their father, Marvin Sands, founded the company now known as Constellation in 1945. Watch Jim Cramer's full interview with Constellation Brands CEO Bill Newlands below. (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. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Constellation Brands' Corona Light is displayed for sale at a grocery store in New York.

Scott Eells | Bloomberg| Getty Images

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