Is Constellation Brands Stock a Buy After Q2 Results?

If you've been a member of the Moby Family for a while now, you've heard us talk about Constellation Brands before.

If this doesn't sound familiar or you're new here, here's the high level on the company:

While the parent company (Constellation Brands) is not a household name, most people should be familiar with its brands. They include:

• Beer: Corona, Modelo Especial, Negra Modelo, Pacífico, etc.

• Spirits: Svedka Vodka, Casa Noble Tequila, High West Whiskey, Nelson's Green Brier Tennessee Whiskey, etc.

But outside of the individual names in their portfolio, they're the largest beer importer in the US and have the third-largest market share of all major beer suppliers globally. They also have large investments in medical and recreational cannabis.

So long story short, Constellation Brands is a powerhouse in the adult beverage and cannabis space.

And now that you're up to speed on who they are, let's dive into our thesis on them, our outlook, and what we think about their stock price's outlook.

Constellation Brands ($STZ) Overview:

As we've mentioned several times now, Constellation Brands is one of our top plays in the beverage sector for 2022 and beyond.

While 17% performance over the last year doesn't feel UNREAL relative to the last few years of returns, when we compare it to the S&P 500, it becomes a lot more exciting given the S&P 500 is down 12% over the same time period.

So why has Constellation outperformed so spectacularly?

While we can point towards a ton of reasons, the core of their growth has been attributable to what we covered during our last analysis on them. And that was:

• In the spring, STZ reported another quarter of earnings that beat expectations. At the time, one of the key items they beat on was EPS ex-Canopy. EPS came in at $2.55 which was way ahead of expectations of $2.18. STZ also beat revenue expectations by over 4%, operating income by 4%, and gross profits by 3%.

• STZ's forward-looking guidance was above expectations in the spring. And while their results were important, the team there put out guidance that suggested they could grow EPS up over $11.50 in the next 12 to 24 months.

So, okay that's gotten us here. But what's changed since the spring? Hold your horses -- we'll get into that right now.

Constellation in 2022:

The last 6 months at Constellation has been nothing short of exceptional.

Their performance has been so exceptional that we're raising our EPS estimates once again. The reason we're raising our estimates is because of their beer depletion and capital investments.

Last we spoke on their beer depletion, Constellation's in-person beer demand accounted for 11% of depletions relative to the 15% average pre-COVID.

What this means is that in-person demand for beer still has not recovered to pre-pandemic levels. This suggests that beer demand still has plenty of upside left before we approach "a top". 

Well, fast forward to today and that number has surged higher and is anticipated to finish the next 12 months near the 13% level.

So what's causing the surge? Well, on-premise beer growth is up 27% YoY (year-over-year) and is expected to grow even further over the back half of 2022.

And despite record shipments in Q2, there's still a supply crunch, which is holding back their growth potential.

But Constellation is doing something that other companies like Tesla are doing as well. And that is vertically integrating (more on this below).

Constellation is building out several new facilities which will help them ramp up and maintain production over the next several years.

Constellation Investments:

So what are these new facilities they're investing in? There are three key projects, which include:

1. A 5M hl (Hectoliters: 1 hl = 100 liters) ABA capacity facility in Nava, Mexico. While this is set to go live next year, this new facility will free up beer capacity as Constellation shifts ABA production from beer lines to these ABA lines.

2. Another 5M hl facility in Obregon, Mexico which is set to go live in 2024.

3. The last investment is the biggest with a 10-15M hl facility in Veracrux, Mexico. While this is the furthest out, we're projecting that 5M of this full capacity starts in 2026 with the rest in 2027 and beyond. But the good thing about this facility is that the buildout is modular -- which means that they can use the facility before its fully completed. 

So why are we telling you about these facilities? Well over the last few years, the entire world ran and is still running into, supply chain issues.

Go figure, globalization isn't what it's all cracked up to be.

That's why the smart companies, like Tesla & Constellation, are bringing back many of their supply lines onshore.

While these facilities will take several years to get up and running, these necessary expenditures will allow Constellation to not only keep growing, but do so at higher margins and with a much less disruptable supply chain.

Yes, this costs a lot of money to build -- but these are three brilliant decisions to make and therefore help us increase our projections in years 2023 and beyond.

Their Outlook:

While there's nothing major to report outside of what we discussed above, the key thing to note is that Constellation keeps making the right decisions.

That's why we're using this time to reiterate our overweight rating and continue on with our price target.

Right now we see Constellation's valuation is still cheap and not reflective of their long-term growth potential. 

This is because they're trading at a large (over 30%) discount to their historical P/E ratio, given expected topline growth.

If we even factor in their debt to build their facilities, their EV (enterprise value) to EBITDA multiple shows that they're trading still at a 20% discount to their more highly leveraged peers.

However you slice it, the takeaway is that Constellation is still being ignored.

While picks like these are not going to be the 25x'ers in your portfolio, these are strong companies, with limited risk, that will help you maintain solid growth amidst a turbulent backdrop.

Price Target: $305 (25% upside)

Current Price: $245

Target Date: 7-10 Months

Rating: Overweight

Ticker: STZ

Market Cap: $46B

Dividend Yield: 1.30%