3 Reasons Constellation Brands’ Stock Could Rise

Constellation Brands (NYSE: STZ), the company behind popular imported beer franchises like Corona and Modelo, is on a roll. Its sales have been booming despite a flat overall beer industry. And that healthy demand has allowed selling prices to spike, too.

Investors have responded to the improving top and bottom lines by pushing shares up dramatically over the last few years. However, the alcoholic beverage giant’s stock has room to continue growing. Let’s look at a few of the trends that could keep Constellation Brands firmly in Wall Street’s good graces.

Image source: Getty Images.

More growth ahead

Sales jumped 10% in the company’s core beer business during the fiscal year that just closed, and that expansion pace put Constellation Brands well ahead of peers like Anheuser-Busch InBev, whose revenue declined in the U.S. market last year. In fact, its Corona, Modelo, and Pacifico brands were responsible for most of the broader industry’s growth in 2017.

That level of outperformance can be difficult to sustain, but Constellation Brands has a good shot at continuing its winning streak. Its beverages are focused on the premium end of the market, after all, which is the fastest-growing niche right now. Constellation Brands also has several offensive strategies in play for the new fiscal year, including the national launch of Corona Premier, the first major expansion in that brand’s 25-year history.

Stepped-up marketing support for its other franchises, plus new sales opportunities in places like convenience stores, should also contribute toward another year of market-thumping sales gains that matches, or exceeds, last year’s growth rate.

Rising margins

Constellation Brands has boosted earnings by 20% or more in each of the last five fiscal years. However, that impressive pace is set to decelerate to a still-substantial 10% increase in the coming years.

STZ Operating Margin (TTM) data by YCharts.

CEO Rob Sands and his executive team are predicting flat profitability in both the beer and the wine and spirits segments this year, but there are two reasons not to worry about that projected slowdown. First, it is tied to increased marketing support for new brands like Corona Premier rather than any weakening demand or falling market share. And second, assuming at least steady demand, Constellation Brands’ margins should rise over the long term as the billions of dollars it has invested into expanding and upgrading its Mexican brewery network begin lowering costs.

Smart capital moves

The company is projecting record operating cash flow this year, and, thanks to a recent 42% hike in the dividend payout, shareholders can expect direct returns of a large portion of that treasure. But the better news for investors is that Constellation Brands is likely to use its financial strength to boost the value of the business.

It was management’s bold decision to buy the rights to the imported beer franchises, after all, that put the company on its current blistering sales and profit pace. Executives have followed that game-changing acquisition up with many other solid purchases, including recent additions like Ballast Point and Funky Buddha breweries.

Constellation Brands’ equity investment in cannabis specialist Canopy Growth demonstrates that management is still actively hunting for new business lines that, like its 2012 purchase of Corona and Modelo, could supercharge growth for years to come. There’s no guarantee any one of these investments will pan out, but I believe management’s track record for capital spending tilts the odds in their favor. And with the company set to generate $2.5 billion of operating cash this year, up from $1.9 billion last year, executives will have plenty of resources to direct toward whatever growth opportunities arise.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

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