Constellation Brands - A Diversified Tale Of Making The Best Of A Slow Growth Industry

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The Diversified Tale Of Constellation Brands

Constellation Brands Inc STZ might not be in the S&P but it is a Fortune 500 company, the largest beer import company in the US by sales with the third-largest market share of all major beer suppliers. Beer is one of the original alcoholic beverages that was developed at the dawn of human civilization and is now a staple of the world’s economy. So, Constellation’s tale does reflect a lot of macroeconomic conditions. But what’s interesting about Constellation is that it is one of the largest diversified beverage companies around. Along with its well known beer brands, Corona, Modelo, and Pacifico and several wine and spirits brands, it also owns almost 40% of Canopy Growth Corporation CGC, a deal that for now has not lived up to expectations as last October, Constellations wrote down the value of its stake in Canopy Growth by as much as $1.06 billion.

Until recently, Constellation was enjoying a double-digit-percentage sales growth from its beer brands which account for almost three-quarters of its revenue and almost 80% of its total profits. But growth is now slowing down to a single-digit-percentage pace, joined by rising input costs. However, only 30% of Constellation’s operating profit margin is dependent on this alcoholic beverage.

The beer industry is dominated by massive conglomerates like Heineken HEINY the world’s second largest brewer and even Heineken warned earlier this ear that full year operating profit would grow but at a slower rate due to an economic slowdown despite beer drinking having returned to pre-pandemic levels that fueled a better-than-expected 2022 profit.

Constellation’s Revamping Seems To Be Working

On Friday, Constellation Brands reported better than expected Q1 results due to a more than 40% improvement in e-commerce direct to consumer sales, showing that consumers are successfully adopting D2C digital channels. CEO Bill Newland revealed that the company’s omnichannel strategy resulted in the creation of additional pillars of consumer-led growth, such as international and D2C, with the later boosting the channel’s net sales 13% in the reported quarter.

Wells Fargo analysts noted that the May quarter was the first sequential relief and quarterly improvement in nearly two years, despite higher-than-expected marketing sending as Constellation has been learning from its soda business to induce drive beer growth.

Constellations maintained its fiscal year 2024 guidance, guiding for EPS in the range of $11.70 to $12.00, excluding its Canopy Growth. Net sales growth is expected in the range between 7% and 9% for beer, while organic wine and spirits are guided in the range between negative 0.5% and positive 0.5%.

Debt Somewhat Spoils The Picture

Unlike Boston Beer, Constellation has debt, and this is an often occurrence at massive global beer conglomerates in this slow-growth industry.

As of May 2023, Constellation Brands owed $12.3 billion of debt, which means it added $11 billion, with the figure being comprised of short-term liabilities amounting to $3.19 billion long-term liabilities of $12.7 billion. On the other side is $192.5 million in cash along with receivables valued at $933.1 million due within 12 months. Therefore, liabilities outweigh the sum of its cash and near-term receivables by $14.7 billion. Fortunately, Constellation Brands has a market cap of $45.1 billion so it is able to raise capital. But, with debt being 3.7 times its EBITDA, its EBIT cover its interest expense 6.7 times over and its EBIT have dropped 7.3% in the last twelve months. If earnings continue to decline, debt will become an issue.

Although the balance sheet is the place to look at when there’s debt in question, in Constellation’s case, it is future earnings that will more than anything determine its fate.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.