Constellation Brands posts strong results in beer, overshadowing misses elsewhere

Published Fri, Jan 5 20241:41 PM ESTUpdated Fri, Jan 5 20242:56 PM EST

Constellation Brands on Friday delivered mixed quarterly results, but investors are rewarding the beverages company for the strong performance of its beer business. Net sales for the three months ended Nov. 30 inched up 1% year over year to $2.47 billion, versus Wall Street's expectations of $2.54 billion, according to LSEG. Adjusted earnings-per-share (EPS) advanced 13% compared with the same period last year, to $3.19, above the $3.00 per share predicted by analysts, LSEG estimates showed. Excluding equity losses from Constellation's stake in cannabis company Canopy Growth , adjusted EPS came in at $3.24 per share. In addition to the headline numbers, adjusted operating income of $820 million was up 6.5% over last year and above the $805 million consensus estimate, according to Bloomberg. Operating cash flow came in at $725 million while free cash flow came in at $395 million — both well ahead of expectations. Constellation shares rose more than 3% in midday trading Friday, to roughly $250.40 a share. This stock action represents a break above the 200-day moving average of about $244), a level that has served as resistance going back to early October, when the stock fell below it on the back of its September quarter earnings. According to the " Principle of Polarity ," which states that resistance, once broken, becomes support, those watching the charts may now look to that level for support. It's not what we focus on at the Club — we are all about the fundamentals — but worth noting. Bottom line The results were largely positive. In the beer segment, the company reported an acceleration in the depletion rate, which represent U.S. domestic distributor shipments to retail customers, and strong profitability. Moreover, management raised its full-year operating income outlook for business. The performance of its wine and spirits business was another story, missing on both sales and operating income thanks to double-digit declines for both shipments and depletions. The results forced management to cut its full-year financial outlook for the segment. We don't have much say in defense of the wine and spirits business. But the presence of activist firm Elliot Management should keep management accountable on what to do with this underperforming business. Elliot and Constellation entered into a cooperation agreement in mid-2023 as Elliot said it could help unlock significant value . The management team did say it will have more thoughts to share on the next call following a deeper investigation to better understand how to turn it around. Divesting the business could be a solid option. But to do that, the team must first stabilize the business — or ideally get it back to growing — in order to sell it for a fair price. Fortunately, beer is doing well enough to offset the horrendous performance in wine and spirits. As a result, management reaffirmed its consolidated comparable earnings guidance (ex-Canopy) and raised its full-year outlook for operating and free cash flow. We reiterate our 1 rating and $270 price target and remind members to tune in to Mad Money Friday to catch Jim's conversation with CEO Bill Newlands. Quarterly results Beer sales climbed 4% year over year, to $1.97 billion, coming in a bit below Street's expectations. Operating income, however, came in ahead of expectations ($757 million versus $745 million expected) thanks to margin expansion on the back of sales growth, price hikes and marketing spend cost efficiencies. The benefits were partially offset by higher raw material input costs and costs associated with capacity expansion. Beer shipments to distributors rose 3.4%% annually, a deceleration from the 7.9% rate in the fiscal second quarter. However, depletions accelerated to 8.2%, up from the 7.9% in the prior quarter and well ahead of the 6.2% expected. Constellation was the top share gainer in market dollars in the U.S. beer market for the tenth quarter in a row, and had five of the top 15 growing brands on the market. Modelo Especial remains the top brand share gainer and leading brand across the whole U.S. beer category in dollar sales. Meanwhile, sales at the wine-and-spirits division came in at $502 million, a decrease of nearly 8% from last year and below expectations. Operating income also missed, despite an improvement in the operating margin resulting from lower freight, warehousing, and material costs. Lower shipment volumes, which fell 11.6% versus the year-ago period, were a drag. Depletions weren't much better, falling 10% year over year. On the post-earnings call with investors, management reaffirmed its belief that with the portfolio's transformation to higher-quality products largely complete, they can achieve net sales growth of 1% to 3% with an operating margin in the 25% to 26% range. Given the guidance, it doesn't look like that's happening this fiscal year. But the strength in beer does buy the company some time before investors lose patience with the segment. Guidance Management reaffirmed its full-year comparable EPS forecast of $12 to $12.20 per share, ahead of the $11.93 Wall Street was modeling coming into the print. The forecast excludes Canopy Growth. Assumed in this guidance is net sales growth for beer of 8% to 9% (unchanged) and operating income growth of 7% to 8% (up from a range of 6% to 7% previously forecast). As for wine and spirits, organic net sales are now expected to decline 7% to 9% (down from a range of negative 1% to 2% previously), while operating income is expected to decline between 6% and 8% (down from a range of up 2% to 4% previously forecast). Additionally, operating cash flow is now expected to hit between $2.6 billion and $2.8 billion (up from the $2.4 billion to $2.6 billion range previously provided). Taking out capital expenditures of $1.2 billion to $1.3 billion (unchanged), the free-cash-flow forecast comes in between $1.4 billion and $1.5 billion (up from the $1.2 billion to $1.3 billion range previously provided). (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. 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Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico.

Susana Gonzalez | Bloomberg | Getty Images

Constellation Brands on Friday delivered mixed quarterly results, but investors are rewarding the beverages company for the strong performance of its beer business.