Constellation Brands Inc.’s (STZ - Analyst Report) shares rose 4.53% after the company reported stellar third-quarter fiscal 2016 results. The top and bottom lines exceeded expectations and improved year over year, thereby encouraging management to raise its outlook for the full fiscal year.
Results were mainly backed by continued strength in the company’s beer business, improving trends at its wine and spirits business, and solid overall depletion trends.
Q3 Highlights
The company’s adjusted earnings for the third quarter of fiscal 2016 jumped 15% year over year to $1.42 per share, cruising way ahead of the Zacks Consensus Estimate of $1.29. This marked the company’s fifth straight quarter of positive earnings surprise.
Constellation Brands Inc. (STZ - Analyst Report) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany
On a reported basis, the company registered earnings of $1.33 per share that surged 21% from the year-ago comparable quarter.
Net sales advanced 6.4% to $1,640.5 million, driven by strong organic sales growth and gains from the Meiomi acquisition, partly offset by currency headwinds. On a currency adjusted basis, consolidated organic sales grew 6%. Moreover, the company’s top line exceeded the Zacks Consensus Estimate of $1,618 million.
Sales also benefited from strong volumes at the beer business, which drove 8% sales growth in that segment. The segment also witnessed a 16% rise in depletions, backed by solid demand. Meanwhile, wine and spirits’ sales improved 3% year over year, on a constant currency basis, mainly driven by favorable mix.
Cost and Margin Performance
Adjusted gross profit for the quarter rose 13% year over year to $759.4 million, mainly backed by lower cost of sales. Consequently, adjusted gross profit margin expanded 160 basis points (bps) to 46.3%.
Constellation Brands' comparable operating income escalated 14.6% to $475.8 million, with the comparable operating margin expanding 210 bps to 29%. This was backed by solid operating income growth at both the beer (up 20%), and wine and spirits (up 12%) businesses. The beer segment gained from higher volume, effective pricing and lower cost of products sold, while growth at the wine and spirits segment was attributed to the Meiomi acquisition, favorable mix and lower cost of sales. However, results at both segments were partly impacted by higher marketing expenses.
Financial Position
Constellation Brands ended the quarter with cash and cash equivalents of $491.3 million. As of Nov. 30, 2015, the company had $6,515 million of long-term debt (excluding current maturities) and its total shareholders’ equity was $6,596.7 million.
During the first three quarters of fiscal 2016, Constellation Brands generated $1,091.6 million in cash from operations and free cash flow of $578 million.
On Jan 6, 2016, the company declared a quarterly cash dividend of 31 cents per share on Class A shares and 28 cents per share on Class B shares, payable on Feb. 24, to shareholders on record as of Feb. 9.
Other Developments
With a view to support the future growth of its Mexican beer business, which is currently outperforming the U.S. beer business, the company announced plans to build a new brewery at Mexicali in Mexico and further expand the capacity of its Nava brewery.
The Mexicali brewery, ideally located close to the company’s largest beer market – California, will be initially built to produce 10 million hectoliters with the provision to expand its capacity to 20 million hectoliters later. The company expects to complete the construction of the first 5 million hectoliters brewery by end of calendar year 2019. The estimated cost of this new brewery is $1.5 billion, with additional $500 million to accommodate scalability to 20 million hectoliters capacity.
At the Nava brewery, the company now intends to expand capacity by another 2.5 million hectoliters, taking it to 27.5 million hectoliters capacity from 25 million hectoliters planned already. The estimated cost of this expansion is around $250 million and the company plans to complete this by early calendar year 2018. Currently, the company is on track to expand the capacity of this brewery from 10 million to 20 million hectoliters by Jun 2016, and from 20 million to 25 million hectoliters by summer 2017.
Another major step toward solidifying its position in the beer market was the completion of the Ballast Point craft beer acquisition in the third quarter.
Fiscal 2016 Outlook
Following the spectacular third-quarter results and taking into consideration the Meiomi and Ballast Point acquisitions, management raised its earnings outlook for fiscal 2016. Constellation Brands now envisions adjusted earnings in the range of $5.30–$5.40 per share, up from $5.00–$5.20 expected earlier.
On a reported basis, earnings per share in fiscal 2016 are now anticipated to be $5.05–$5.15, higher than the previous guidance of $4.73– $4.93.
Further, the company now expects its beer segment’s net sales for the fiscal year to grow about 12%–14% compared to 10% growth expected earlier. Operating income at the beer business is now expected to increase 22%–24% (excluding any benefit from the Ballast Point acquisition), compared with a 15%–18% rise projected earlier. Further, the company’s wine and spirits’ sales, and operating income are still expected to grow in the low-to-mid single-digit range, excluding any benefit from the Meiomi acquisition.
Certain factors were taken into consideration before providing the earnings guidance. These include an interest expense expectation of $310–$320 million, an approximate tax rate of 30% and weighted average diluted shares outstanding of approximately 204 million.
Despite the incremental investments announced, Constellation Brands lowered its capital expenditure guidance to $875–$925 million for fiscal 2016 from $1.05–$1.15 billion expected previously.
The company also raised its free cash flow expectations to $475–$525 million from $200–$300 million expected earlier. Also, operating cash flow for the full fiscal is now anticipated in the range of $1.35–$1.45 billion compared with $1.25–$1.45 billion projected earlier.
Zacks Rank
Constellation Brands currently carries a Zacks Rank #2 (Buy). Some stocks in the related beverage-soft drinks space worth considering include Dr Pepper Snapple Group, Inc. (DPS - Analyst Report), Coca-Cola FEMSA S.A.B de C.V. (KOF - Snapshot Report) and Primo Water Corporation (PRMW - Snapshot Report), each with a Zacks Rank #2.
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