This alcohol giant is increasingly focused on premium brands and saw its core business increase both its revenue and earnings in the latest quarter. Still, it’s expecting its $5 billion investment in a leading cannabis company to further lift its profit in 2019.
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Constellation Brands Inc., $160.20, symbol STZ on New York (Shares outstanding: 187.5 million; Market cap: $30.0 billion; www.cbrands.com), is an international producer and marketer of beer, wine and spirits. Founded in 1945, Constellation has more than 100 brands in its portfolio, owns 28 wineries, breweries and distilleries, and employs 9,600 people.
The company is the largest multi-category supplier (beer, wine, spirits) of alcoholic beverages in the U.S. and the third-largest beer company in the U.S. In fiscal 2018 (ended February 28, 2018), beer accounted for 61.4% of total revenue, wine 33.7%, and spirits 4.9%. International sales (primarily from Canada) accounted only 3.4% of the company’s revenue.
Constellation’s well-known brands include Corona, Modela, Pacifico, Ballast Point, Funky Buddha, Robert Mondavi, Ruffino, 7 Moons, Svedka Vodka, High West Whiskey, Casa Noble Tequila, Black Velvet, and Paul Masson.
The company’s CEO is Robert S. Sands, and the Sands family holds controlling interest.
Constellation continues to position itself at the premium (high-profit-margin) end of the alcoholic beverage market.
Since acquiring exclusive brand rights to Corona in 2013, the company has invested $2.9 billion in its Mexican beer brands, including $800 million during fiscal 2018. Production capacity in Mexico has increased 315% during that time, from 10 million to 31.5 million hectolitres. The company recently introduced Corona Premium and Corona Familiar, two specialty brands aimed at the high-end beer market.
In its Wine and Spirits segment, Constellation has expanded its portfolio of higher-profit-margin brands through acquisitions: Casa Noble tequila in 2014, Meiomi wines in 2015, Prisoner super-luxury wines in 2016, Charles Smith wines in 2016, High West craft whiskeys in 2016, and Schrader Cellars in 2017.
The company entered the growing craft beer market by acquiring Ballast Point in 2015 and Funky Buddha in 2017.
In 2016, Constellation sold off its lower-margin Canadian wine business.
Largely as a result of its recent acquisitions, overall revenue increased 23.8%, from $4.87 billion in 2013 to $6.03 billion in 2014. It then rose 8.6% to $6.55 billion in 2015 and 11.9% in 2016 to $7.33 billion. Revenue again increased in 2017 by 3.6% to $7.59 billion.
Earnings jumped 39.0%, from $643.1 million ($3.25 a share) in 2013 to $893.6 million ($4.44) in 2014. Profit then rose 23.8%, to $1.11 billion ($5.43) in 2015 before jumping another 25.2% in 2016, to $1.38 billion ($6.76). Earnings then rose 27.3% to $1.76 billion ($8.72) in 2017.
For the three months ended November 30, 2018, Constellation’s revenue rose 9.4%, to $1.97 billion from $1.80 billion a year earlier. Earnings before unusual items gained 14.2%, to $461.7 million from $404.3 million. Due to fewer shares outstanding, per-share earnings improved 17.9%, to $2.37 from $2.01.
In November 2017, the company acquired a 9.9% stake in Canopy Growth Corp. for $190 million. The Canada-based firm sells cannabis products under the Tweed brand. The two companies plan to work jointly on cannabis-infused drinks in the future.
The partners aim to initially sell those drinks in Canada given expectations Ottawa will legalize edible and drinkable cannabis products in October 2019. They will not sell those edibles (or cannabis itself) in the U.S. until the U.S. federal government changes its marijuana laws.
Canopy and Constellation recently expanded their strategic relationship. On November 1, 2018, the company purchased an additional 104.5 million Canopy shares at $48.60 a share, for a total of $5.1 billion. That raised Constellation’s stake in Canopy to 36.6%. It will also nominate four directors to Canopy’s seven-member board.
As well, the company received warrants to purchase additional Canopy shares over the next three years. If it exercises those warrants (worth $4.5 billion in total), it will own over 50% of the cannabis company.
The alcoholic beverage industry is highly competitive and is threatened by a general decline in alcohol consumption. Constellation is particularly dependent upon its Mexican beer brands and brewing facilities. The company also faces risk from its growth-by-acquisition strategy.
However, Constellation Brands has successfully positioned itself at the centre of the premium market. As well, cannabis-infused beverages offer growth potential and the company hopes to be one of the first to bring its product to market when these products become legal. (Both Molson Coors and Heineken also aim to develop cannabis-infused beverages.)
Constellation’s partnership with Canopy Growth also gives the company a head-start in the evolving cannabis-product industry—both in Canada and internationally as medical and recreational marijuana become legal in more and more countries.
As of November 30, 2018, the company held cash of $130.6 million. Its $11.8 billion long-term debt is equal to 39% of its market cap.
Constellation’s shares fell over 12% recently after it cut its earnings outlook for all of fiscal 2019. It now expects to earn between $9.20 and $9.30 a share, compared to its earlier range of $9.60 to $9.75 a share. The stock trades at 17.3 times the midpoint of its new range. The $2.96 dividend yields 1.8%.
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