Analysts Still Bullish On Constellation Brands After Conference 'Curveballs'

Constellation Brands, Inc. STZ shares took a hit Wednesday after the company presented at the Consumer Growth Analyst Group of New York (CAGNY) conference this week. Investors seem to be disappointed with the company’s projected earnings growth rates and the negative impact of its recent Canopy Growth Company CGC investment.

Constellation management said its fourth-quarter EPS will take a 10-cent hit thanks to its Canopy investment. In addition, the company is projecting 10 percent annual EPS growth over the next three years. Constellation also said it's looking to divest some of its wine assets for at least $3 billion.

Bank Of America’s Take

Despite the negative immediate market reaction to the presentation, Bank of America analyst Bryan Spillane said much of the information in the presentation wasn’t surprising. He said there were likely three reasons for the negative knee-jerk reaction:

• Canopy’s implied fiscal 2020 EPS of between $8.50 and $8.75 was likely below what some investors are hoping.
• The wine assets Constellation is looking to offload represent more earnings power than Spillane had assumed.
• Management reiterated its previous expectations that beer margins will be mostly flat moving forward.

Despite the sell-off, Spillane still likes the stock.

“We continue to like the stock based on the underlying growth of beer and wine, strong cash flows and the long-term potential earning and growth potential for Canopy,” he wrote in a note.

Bank of America has a Buy rating and $188 price target for Constellation.

Wells Fargo Weighs In

Wells Fargo analyst Bonnie Herzog said Constellation once again hit her with a few "curveballs" at the conference. The most notable subtle change was management lowering beer segment earnings growth projections for the next three to five years from a previous range of between high single-digits to low double-digits to a new growth projection of the high single-digits.Still, Herzog said Constellation has several earnings growth levers at its disposal, including pricing power.

“In short, we remain excited about the Canopy investment as well and continue to believe that STZ’s decision to invest in this emerging category so early on will ultimately yield an exciting growth engine in the coming years,” Herzog wrote in a note.

Wells Fargo has an Outperform rating and $235 price target for Constellation stock.

Macquarie Not Surprised

Macquarie analyst Caroline Levy said Constellation’s updated guidance wasn’t a major surprise.

“STZ acknowledged, as we had expected, that Canopy will become more dilutive in FY20 than FY19, not just from carrying a full year of interest expense, but also due to investment to capture market opportunities in cannabis,” Levy wrote.

She said any further earnings hit that Constellation takes once its wine asset sales are completed will be more than offset by boosts to sales growth and margins. Constellation’s guidance for flat beer margin growth in 2021 was slightly below Macquarie’s forecast for 0.75 percent margin expansion.

Macquarie has a Neutral rating and $162 price target for Constellation.

The stock traded around $165.78 per share at time of publication.

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Photo courtesy of Constellation Brands.