Constellation Brands (STZ 219.90, +9.15, +4.34%) is trading higher after beating
second quarter estimates and raising earnings guidance for fiscal 2019.
Second quarter revenue grew 10% to $2.3 bln, adjusted operating income rose 9%, and comparable EPS grew 16%, topping estimates.
In the beer segment, the Modelo and Corona brand families drove strong portfolio performance and market share gains with depletion growth of 10% (up from 9% in the first quarter). The beer business achieved record operating margin of 41.3%, an increase of 10 basis points, as benefits from favorable pricing and operational performance were offset by higher transportation costs and marketing investments.
Marketing spend was front-end loaded and has paid off for the company. Constellation expects continued momentum as the beer business is firing on all cylinders.
In the wine and spirits business, 9% shipment volume growth benefited from timing ahead of the holiday period, while depletions improved to 0.2% growth from a 3.6% decline in the first quarter.
The company raised fiscal 2019 EPS guidance to $9.60-9.75 from $9.40-9.70. For fiscal 2019, the beer business continues to target net sales and operating income growth to be in the range of 9-11%. For the wine and spirits business, the company continues to expect net sales and operating income growth to be in the range of 2-4%. Constellation also reaffirmed cash flow guidance.
On the call, management reaffirmed extremely bullish expectations for cannabis opportunities after the company invested $4 bln in Canopy Growth (CGC) in August.
Constellation said that after forming a joint venture with CGC to develop beverages, it became apparent that the market will be explosive, so there was no reason why they should limit its market to beverages.
The company expects Canopy to capture significant market share in the recreational market in Canada, where legalization becomes official on October 17.
Constellation said they are ”by far” best-positioned in the world to capitalize on what's going to be a massive market. Pointing to the market in the U.S., the Farm Bill is likely to legalize CBD in the coming months, and potential for Federal cannabis decriminalization thereafter would leave decisions up to the states. Constellation said they are focused on branding and staying ahead of the curve with respect to the science.
Chief executive Rob Sands made it clear that it is an offensive move, not a defensive one, as the core business is doing better than ever: "The double digit EPS growth we delivered in the second quarter is top-tier for consumer product companies. Constellation remains the high-end leader and the most significant growth contributor in the U.S. beer market, and we're seeing strong growth trends for the super-premium plus segment of our wine portfolio. Our $4 billion investment in Canopy Growth provides us with a strong foothold in the emerging global cannabis market, which could be one of the most significant growth opportunities of the next decade."
Constellation has a $42 bln valuation and trades at ~22.5 fiscal 2019 EPS.
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