What to expect when beer king Constellation Brands reports earnings Thursday morning

Published Wed, Oct 4 20231:03 PM EDT

Lots of Wall Street firms are getting out ahead of this week's earnings from Constellation Brands (STZ) with price target increases. The latest burst of optimism around this Mexican beer powerhouse appears to be warranted as alcohol sales tend to hold up even when consumers are watching every dollar they spend as they are now. Constellation is set to release results for the three months ending in August on Thursday before the opening bell. It's a chance to see if reiterating full-year forward guidance after a May-quarter beat back in June was an under-promise, over-deliver situation or conservative for a reason. At the time, we were optimistic and increased our price target on the Modelo and Corona maker to $270 per share from $260. Shares exceeded our target, closing at an all-time high of $272.80 back in July. However, since then, the stock has drifted lower. For the company's fiscal 2024 second quarter, earnings per share (EPS) are expected to rise 5.9% year-over-year to $3.36, according to the analyst consensus estimate from data provider LSEG, formerly known as Refinitiv. Revenue for the quarter is expected to increase 6% to $2.82 billion. Aside from the reported numbers, we'll be watching for any guidance on what to expect in the company's fiscal Q3 or beyond. In one of the key observations around the fiscal Q1 report, management said that while beer depletions — an industry term for the number of cases that are sold to retailers by a distributor — were a bit short of expectations, performance accelerated through the quarter and through June. We'd like to see that trend continuing. While Americans don't tend to skimp on beer purchases in tough times, there are a number of challenges that consumers are currently facing. Certainly, higher interest rates, which means more expensive credit, have been a headwind ever since the Federal Reserve started raising policy rates back in March 2022 to fight inflation. Despite 11 Fed rate hikes so far, inflation remains sticky and that's squeezing shoppers with high prices. And, as of this month, federal student loan payments resumed after a Covid hiatus. KeyBanc analysts see the revival of student loan payments as a "substantial headwind" in spending for 40 million Americans. STZ YTD mountain Constellation Brands YTD Some Constellation investors are concerned about the premium price tags that the company's beers carry, Citi analyst Filippo Falorni told CNBC in an interview. However, he sees resiliency in this category because people view beer as an "affordable indulgence." This means that even though there's been a lot of pressure on consumers, there hasn't much trade down in the beverage/alcohol space, he explained. Falorni said that Constellation also has an edge in "gaining a significant amount of shelf space" at retailers. When measuring beer growth, he assesses how much shelf space companies get every year and how quickly those products fly off the shelves. This positive trend is supported by strong traffic among new, younger consumers; continued preference for Constellation beers in the key Hispanic market; and an innovative product pipeline. All these factors "drive solid beer growth even as the macro environment gets worse," Falorni said. Wedbush also thinks Constellation will be able to weather those macro consumer storms and continue to drive earnings and revenue growth. In a note Tuesday, the analysts raised their price target on the stock to $300 per share from $275 and added it to the research firm's Best Ideas List. Wells Fargo, JPMorgan and Goldman Sachs are among the other firms recently increasing their price targets. In fact, last month, we wrote about Goldman's $30-per-share PT increase to $305 based on Constellation's ability to generate total beer sales growth "at the high-end of management's 7% to 9% growth" in the coming five years, given "very strong" beer volume trends. Constellation certainly has the beers people want to drink. Over the summer, Modelo Especial became the top seller in the U.S., taking Bug Light's crown, amid conservative backlash over a Bug Light marketing campaign with a transgender influencer. As strong as Constellation in beer, it's wine and spirits business — which includes Simi wines and SVEDKA vodka — continues to slump, with sales at the unit dropping year over year in fiscal Q1 and coming in below estimates. Given those dynamics, Jim Cramer believes it could be prudent for Constellation to divest it and become a "pure play beer company," and use that money to buy back stock. During Thursday's post-earnings conference call, we'll not only be listening for management's outlook on the business but also for any ideas or plans like that to unlock shareholder value — especially since CEO Bill Newlands teamed up with activist firm Elliott Management. As of June 30, Elliott reported in securities filings that it owned 441,000 shares of STZ. As of Monday's close, those shares were worth nearly $110 million. Earlier this year, Elliott was involved in a multi-activist situation at fellow Club holding Salesforce (CRM), which resulted in more value for shareholders. Back in July, Constellation announced Elliott's involvement and subsequently added Luca Zaramella, CFO of Mondelez International (MDLZ), and Bill Giles, the former CFO of AutoZone (AZO) to its board. Moves like this at Constellation have been made possible thanks to the company late last year eliminating its dual-class share structure , which had concentrated the voting power with the founding Sands family. Falorni called the Elliott partnership a "very important catalyst." However, he said, a potential sale of some wine and spirits brands, or even the whole segment as Jim sketched out, is more of a debate that may happen next year. "Elliot would want to see more consistent delivery in wine and spirits. If they don't achieve that delivery, they'll think about strategic alternatives." Investors like us will also be looking ahead to the company's Investor Day, which will take place on Nov. 2. That's when management will be discussing updates to the business, investment priorities and capital allocation plans — important topics that will show a clearer roadmap to the future of Constellation's business strength. (Jim Cramer's Charitable Trust is long STZ. 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Corona beer, owned by Constellation Brands.

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