Adult Beverages Are A Staple Too
Constellation Brands (NYSE: STZ) star was rising even before it reported earnings today. The latest report from Nielson shows a marked and sustained spike in at-home beverage consumption that is underpinning sales within the industry. The spike, associated with pantry-loading and stay-at-home trends, proves that for many adult beverages are a staple item too.
According to Nielson, sales of at-home beverages increased 26% YOY in the 2nd quarter with spirits and wine leading the charge. What’s better, data for the most recent week, the 2nd to last week for the quarter, show little signs of demand tapering off. Beer sales, the laggard, is up a mere 21.4% for the quarter and 16% YTD. Looking forward, sales of at-home beverages are likely to be boosted in the second half by the slow resurgence of away-from-home consumption.
The Headline Results Are Mixed … But
The headline results are a bit mixed but there are some mitigating factors that make this stock a buy. On the top-line, revenue fell by 6.7% to miss consensus but the miss is negligible. The $10 million shortfall is only about 0.5% of the net and a drop in the bucket for this company. All in all, I don’t think the results are too bad considering the impact of the pandemic and the loss of away-from-home consumption dollars.
On the bottom line, Adjusted EPS came in well ahead of expectations while GAAP EPS missed horribly. The miss resulted in a net loss for the quarter, about $0.94 per share, but this is due to the acquisition of another new brand.
The new brand, Empathy Wines, was purchased for an undisclosed amount and revealed with today’s earnings report. Empathy Wines is described as a high-performing, digitally-native, premium label focused on sustainable production. Constellation says the acquisition aligns well with its vision to create a bold, innovative portfolio of distinctive high-quality brands. Regardless, the acquisition will have a net-positive impact on top and bottom-line results in future quarters.
The Analysts Are Bullish
As part of the brand re-positioning, Constellation is planning to divest a portion of its current wine portfolio. The divestiture will include value brands Paul Mason and Nobilo Wine labels. Following the divestiture, the remaining value brands will be reorganized into a single consolidated business affecting a $130 million cost-reduction. Those savings will be realized in the FY 2021/FY 2022 time frame.
The analysts are bullish on Constellation Brands and getting more bullish by the day. The average rating is a buy leaning toward strong buy with several bullish notes issued over the past few weeks. The latest comes from Bank Of America which has added Constellation Brands to its U.S. 1 list. The U.S. 1 list is a list of top-rated investment ideas among buy-rated U.S.-listed stocks. The goal of the list is to provide superior investment performance over the long term.
The analyst’s consensus price target is just above $190. That’s about a 5% gain from today’s opening price and a new post-pandemic high when reached. Until then, investors can rely on Constellation Brand’s dividend payment which comes out to about 1.79% annually. Constellation isn’t well-known as a dividend grower but the payout ratio (a low 35%) and cash flow suggest today’s payout is more than safe.
The Technical Outlook: Buy, Buy, Buy
The technical outlook for Constellation Brands is bullish. The stock has nearly doubled since hitting its March low and appears set to continue moving higher. Today’s news sparked a surge at the open that has price action moving up from the short-term EMA in tandem with a strong buy signal. The strong buy signal is a combination of bullish crossovers in the stochastic and MACD that point to a protracted upward movement. The risk, for now, is possible resistance at the $190 level, once that’s broken I see a quick move up to the pre-COVID high before new highs are reached later this year.
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The coronavirus crash has not discriminated in its victims. Large-cap, mid-cap, and small-cap stocks have all been dropping. No sector has been spared either. And while the market flipped from a bear market to a bull market in just three days, there’s still plenty of volatility to cause cautious investors to keep a healthy social distance from many stocks.
The pandemic that is forcing most of us to stay in our homes as much as possible (and if you’re not, please do) is unique for most of us. Demand hasn’t organically diminished. It’s been artificially suppressed. And that means that while it’s fair to say our economy will certainly experience a new normal, there will be a recovery.
And when it comes, many of the companies that were strong before the pandemic broke will continue to show their strength. Investors who are investing in these companies today will be the ones that experience the greatest gains when the recovery happens.
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