Constellation Brands, Inc (STZ) is a leading manufacturer and marketer of beer, wine, and spirits in the United States. Household brands in the beer product section deliver reliable sales volume, while the company is also taking calculated steps to increase its presence with wine and spirits products.
With more defensive companies attracting attention as the market witnesses a rotation towards value stocks, Constellation Brands has seen strong price appreciation over the last few months.
Defensive Stocks are Suddenly Attractive
2020 was the year for growth stock domination. In 2021, many popular high-growth names carrying expensive valuations saw major stock price pullbacks. This trend did not seem to affect blue-chip names like Apple (AAPL), Microsoft (MSFT), and other companies where fundamentals make strong bullish cases.
As of late 2021, an apparent rotation towards value has begun, as even established tech names with strong growth and fundamentals were/are hurting. With many analysts proclaiming that more defensive sectors like consumer staples, energy, and healthcare are the places to be for the short term, a consumer product company like Constellation Brands appears more attractive.
The consumer staples sector seems to be gaining momentum during this rotation towards value over the last six-month period, returning a positive 9% since September 2021. This compares to 7% for the S&P 500 over the same period of time.
Stock Performance
After a prolonged period of volatility in the first half of 2021, the final quarter of the year marked big gains for Constellation Brands’ stock. Overall gains reached about 10% in the last 12 months, while over the last five years, the stock has returned 69%. Unlike most defensive stocks, STZ carries a somewhat higher beta of 1.18 (five-year monthly). Constellation Brands also pays a 1.2% dividend.
Business Overview & Growth
Constellation Brands is a growing international producer and marketer of beer, wine, and spirits. The company is one of the biggest beer manufacturers in the United States, while the firm also maintains operations in Italy, New Zealand, and Mexico. An extensive product portfolio, primarily focused on beers, includes household brand names like Corona, Modelo, Pacifico, and more.
While beer is the company’s largest and most popular product category, Constellation Brands also operates in the wine and spirits industry, where a focus on more high-end brands aims to improve profit margins and reach a different customer base. For the Fiscal Year 2021 (ended on February 28, 2021), the beer segment increased its stake in overall sales, accounting for 70.5% of the organization’s net sales.
Constellation Brands displays a respectable growth record for a company in the Consumer Staples sector. Over the past five years, revenue has grown at a 3.65% CAGR, while EBITDA also showed decent growth, at a 3.77% CAGR. Even though net income appears to carry more variability than investors would prefer, free cash flow generation has been consistently following an upward trajectory.
As for the next couple of years, analysts remain optimistic, providing a bullish outlook for Constellation Brands. Sales are expected to increase at a CAGR of around 5% through 2024. The earnings outlook is even better, with EPS forecasted growth reaching low double-digits over the next three years.
DCF Valuation
With the strong run-up the stock has experienced over the past three months, it is only prudent to examine how it reflects on the company’s current valuation. Being a mature company that also exhibits growth attributes, with relatively consistent free cash flow generation, Constellation Brands is a very good candidate for this type of analysis. The DCF valuation presented below will offer an approximation of where the stock’s intrinsic (fair) value currently stands.
Using five years of trailing financial data and based on analyst expectations, unlevered free cash flow was forecasted up until the Fiscal Year 2026. A terminal value was calculated after that, using the Perpetual Growth Model. Given that Constellation Brands’ Fiscal Year 2022 is almost finished, free cash flow for that year was discounted by a factor of one. Some of the input assumptions and determinations that were made are detailed below:
- Required Rate of Return: STZ’s weighted average cost of capital (WACC) was used as the required rate of return. Total debt/market cap was used to determine the weights for debt and equity. The cost of debt was computed by dividing the interest expense by the total debt and then adjusting for taxes.
- When calculating the cost of equity, the U.S. 10-year Treasury yield was used as the risk-free rate. A re-levered beta of 1.03 was selected. Using the Capital Asset Pricing Model (CAPM), the cost of equity sits at 6.6%.
- Free Cash Flow Forecast: Consensus revenue estimates were the baseline for the projection after being adjusted for the average revenue expectation beats over the last three years. Free Cash Flow was projected up until the Fiscal Year 2026 with the help of the FCF/revenue ratio.
- Using the Perpetual Growth Model, the terminal value of the free cash flow was calculated at the end of 2026. A perpetual growth rate of 3.00% was selected as a realistic estimate.
As shown, a fair price for Constellation Brands’ shares was calculated at $228.16 after adjusting for net debt and using consensus estimates that match analysts’ expectations. Given the current stock price of $253, STZ appears to be trading at a premium compared to the fair value calculated, confirming the suspicion that the recent aggressive run-up has stretched the firm’s valuation.
When other valuation metrics are considered, a similar conclusion is reached. At forward P/E and P/S ratios of 24.4x and 5.3x, the stock trades at a small premium compared to peers, even after factoring in the company’s growth prospects.
Wall Street’s Take
Turning to Wall Street, Constellation Brands has a Moderate Buy consensus rating, based on 13 Buys, five Holds, and zero Sells assigned in the last three months.
The average Constellation Brands price target of $275.22 represents 8.7% upside potential from current price levels, with a high forecast of $310.00 and a low forecast of $226.00.
Conclusion
After all things are considered, Constellation Brands makes a good case for investors in terms of reliability, growth, and cash flow generation. That said, other characteristics like increased volatility (beta), a small dividend yield, and a seemingly pricey valuation cause some concern over STZ as a true defensive investment choice.
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