Why Investors Shouldn’t Fear the Constellation Brands’ Spending Madness

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Constellation Brands ( STZ 0.81% ) worried investors ahead of its fiscal fourth quarter earnings report. The alcoholic drinks giant faces several headwinds, including a costly restructuring of its wine and spirits business. The core beer division is also facing soaring costs, even as consumer demand shifts away from previously popular niches like hard seltzer.

On April 7, the company eased some of those growth and earnings concerns while announcing some good cash flow news. But management also released a cautious outlook for the year ahead that includes higher spending.

Let’s dive into it.

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Sales are mixed

Sales trends were positive, as expected, but showed some weak spots for the business. The beer division posted an 8% increase in burnouts, a measure of consumer sales, in the last quarter. Demand was strong for popular imported brands such as Modelo and Corona, and Constellation gained market share in the premium beer niche.

On the other hand, its new product Corona Hard Seltzer has not contributed much to growth in recent months. But at least Constellation Brands didn’t have to incur another round of delisting charges associated with the collapse in demand for hard seltzers, because boston beer did so in its last report.

The wine and spirits segment continues to contract with burnouts down 7% as the company moves away from its low-margin products. Still, operating income increased 6% due to a focus on premium brands such as The prisoner Pinot Noir.

Profit and cash flow

The news was more uniformly positive on the financial side. Operating profit growth outpaced revenue gains in the fiscal fourth quarter, and profits rose even faster thanks in part to aggressive stock buybacks. Constellation generated $1.7 billion in free cash flow for the year, which funded heavy investments in the brewery network as well as increased cash returns.

“Our strong operating results and powerful cash-generating ability have enabled us to return nearly $2 billion of capital to shareholders as part of our commitment of $5 billion by year-end. 23,” chief financial officer Garth Hankinson said. Constellation Brands still plans to spend up to $5.5 billion over the next few years to continue to modernize and expand its brewing business.

Look forward

Investors got a first look at management’s detailed guidance for fiscal year 2023, which includes many of the same themes that dominated 2022. The beer sector will lead the way for growth with sales up 7% at 9%. Earnings growth will be dampened, management warned, due to rising costs. The wine and spirits division will take another step towards stabilization, but sales are still expected to decline slightly as margins increase.

Free cash flow will decline in the range of $1.3 billion to $1.4 billion as the company injects cash into its manufacturing line. This is one of the main reasons why the stock has underperformed the market over the past year. However, Constellation still represents a smart bet on future growth. Just as it has with major acquisitions over the past few years, management is taking aggressive action aimed at increasing margins and accelerating sales gains.

These benefits won’t materialize for some time, but patient investors should have no trouble waiting as Constellation Brands continues to gain market share in the alcoholic beverage industry.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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