Stifel's 5-Year Bullish Stance On Constellation Brands Fizzles

After a more than fourfold increase in Constellation Brands, Inc. STZ over the past five years, Stifel's bullish stance on the stock has come to an end. 

The Analyst

Stifel's Mark Swartzberg downgraded Constellation Brands' stock rating from Buy to Hold with a price target lowered from $245 to $228.

The Thesis

Some of the biggest drivers of the beer and spirit company's stock are its superior growth metrics, including three years of EBITDA growth at an average of 16 percent annually, Swartzberg said in the downgrade note.

Looking beyond these numbers reveals three concerning metrics that "substantially reduce" the likelihood for sales growth outperformance in the near term, the analyst said:

• Constellation's reduction in medium-term wine and spirits annual EBIT growth from mid-to-high-single digits to mid-single digits.
• Beer EBIT margins have already notably expanded from 27.3 percent in fiscal 2014 to 39.5 percent in fiscal 2018.
• The company is lifting its beer marketing spend to support the Corona Premier launch by 50 to 100 basis points from 9 percent of beer sales.
• Constellation's valuation across "virtually every" angle implies the stock is trading at a premium to the benchmark, Swartzberg said, detailing the following figures: 
• The stock has an EV/EBITDA multiple of 16.7x versus a three-year average of 14.9x.
• The three-year average EV/EBITDA multiple is 1.51x versus 1.44x for the S&P 500,
• The EV/EBITDA multiple is above what's implied by sales CAGRs for more than 20 peers.
• Constellation's EV/EBITDA multiple is above the one implied by ROIC for more than 20 peers.

A downgrade of Constellation Brands' stock is now justified after five years, as the market is "pricing in substantial beats and those will be tough to generate," the analyst said. 

Price Action

Shares of Constellation Brands were trading lower by 1 percent at the time of publication Tuesday. 

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