Here's why analysts like Corona beer maker Constellation Brands heading into its earnings report

Published Wed, Oct 5 202212:00 PM EDT

Wall Street analysts are upbeat about Constellation Brands (STZ) heading into its earnings release before the opening bell Thursday, noting the durability of the beer and wine company's business — a view shared by the Club. Constellation has a lock on Mexican beer, with its Corona, Modelo and Pacifico brands. The company's wine portfolio includes Robert Mondavi, Simi and Woodbridge. In its fiscal second quarter, analysts are expecting Constellation to report earnings-per-share of $2.81 and sales of $2.50 billion, according to Refinitiv. In its prior quarter, Constellation beat on the top-line , generating $2.36 billion in net sales, a 17% gain from a year earlier. Adjusted fiscal first-quarter EPS of $2.66 per share was also better-than-expected and represented a 14% year-over-year increase. Here's a closer look at what Wall Street is saying and our take too. What analysts say Research notes from Jeffries, Morgan Stanley and Credit Suisse all mentioned Constellation's beer business as a main area of strength. Jeffries calls Constellation a "long term preferred idea," given its ability to stay defensive in an uncertain economy. While analysts lowered their price target on STZ to $310 per share from $315, they assigned the stock a buy rating. They also highlighted Constellation's ability to take share in a challenged beer market as one of the reasons why it has a long-term positive view on the stock. In its fiscal first quarter, Constellation maintained its No. 1 position as share gainer in the U.S. beer industry as depletion growth in its beer business increased almost 9%. Modelo Especial continued to be the No. 1 share gainer in the segment with depletion growth of 15%. Morgan Stanley expects Constellation to deliver above consensus "beer depletions" — the number of cases sold to retailers by a distributor — for the quarter and raised its guidance for the full year 2023. Analysts estimate shares of STZ are undervalued compared to peers. Their overweight rating on STZ shares is based on its attractive valuation (shares of STZ currently trade at $237.40 which is 19.5 times forward earnings) and beer depletion growth. Constellation's wine and spirits business also outperformed in the U.S., achieving 16% depletion growth last quarter. But analysts estimate a drop in net sales in this category for the current quarter. Morgan Stanley forecasts wine and spirit net sales to fall 4.5%, which is worse than the consensus 3.2%. But their model suggests a drop in wine and spirits would not impact Constellation's consolidated margins. Morgan Stanley analysts estimate a fiscal second-quarter consolidated operating margin of 32.4%, which is higher than the 31.3% consensus and last year's 30.8%. In a period of weaker consumer spending and high inflation, Constellation continues to see strong consumer demand. But since this backdrop hasn't improved, we're interested in hearing how current economic pressures may have impacted its business. One of our big questions is whether Constellation will raise its full year 2023 outlook. In its fiscal first-quarter earnings results, the beer and liquor company estimated consolidated earnings results for fiscal year 2023, excluding Canopy, Constellation's cannabis company, of $11.20 to $11.50 per share. Morgan Stanley address that issues, saying they believe Constellation could raise its full year guidance to $11.40 to $11.70 adjusted EPS (excluding Canopy). Drivers include accelerating sales growth, strong beer trends and market share expansion, which are factors that could also benefit its valuation, the research note explains. Credit Suisse is also expecting a positive quarter. Analysts estimate top-line growth to continue as the company's beer business remains a key market driver. The bank lowered its price target on the stock from $277 from $292 on Sept. 29, citing possible consumer trade-down risks and pressure on margins from the company's wine and spirits business. The Club's take We own Constellation Brands for its in-demand diverse portfolio of beer, wine and spirits. We favor the company for its market share gains in the overall beer category, which has proven to be resilient in the face of consumers trading down. In an economy roiled by inflation, it's expected that some consumers might switch to lower-priced beverages, but Constellation's robust beer growth shows it's not significantly impacted, and is acting as a hedge against inflation. The company is in solid financial standing with a strong balance sheet. Its ability to generate a lot of cash has enabled it to return money to shareholders while still investing in future growth. These are signs of a company that has recession-resistant qualities, which is why we like it in a slowing economy. A point of contention that we would like to see resolved is Constellation's reclassification proposal to eliminate Class B shares. In late June a special committee of the board recommended converting these shares — including those owned by the Sands family, the company's largest shareholder and founding family — to Class A shares. This move will simplify the company's equity capital structure and will better align with voting rights and the economic interests of all shareholders. Investors tend to dislike dual class shares because they give owners voting control over a company, free from the demands of regular shareholders. We recently added to our STZ position, buying 20 shares of the beer company's stock in late September to take advantage of an oversold market. Even though we're in a terrible market, we believe Constellation has little earnings risk and view short-term weakness as an opportunity to add a high-quality company. Shares of STZ are outperforming the broader market, up 11.17% year over the previous year while the S & P 500 is down 15.58% during the same period. (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. 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Constellation Brands' Corona Light is displayed for sale at a grocery store in New York.

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