Alcoholic beverage maker Constellation Brands (STZ) reported mixed third-quarter 2023 results on Thursday before the opening bell. While the results fell short of our expectations, we see the subsequent drop in the Corona beer maker’s share price as an opportunity for investors to buy the shares. Net sales increased 5% year over year to $2.44 billion, surpassing Wall Street expectations of $2.39 billion, according to Refinitiv estimates. Adjusted earnings per share fell 9% compared to the same period a year earlier, to $2.83 per share, below the $2.88 per share analysts had predicted, data from Refinitiv showed. Excluding equity losses from Constellation’s stake in cannabis company Canopy, adjusted earnings were $3.01 per share. Beyond the headlines, adjusted operating income of $770 million was down 7% year-over-year and below the consensus estimate of $786 million, according to FactSet. Operating cash flow came in at $2.3 billion, significantly exceeding analyst forecasts of $817 million, while free cash flow of $1.6 billion was well above the $464 million estimate. Shares of Constellation fell more than 9% Thursday afternoon, trading around $210.30 each. Bottom line All in all, this was not the quarter we were looking for. While strong sales performance and an upward revision to beer sales growth for the year indicate continued demand for the company’s leading brands, profit margins have been plagued by input cost inflation. That, along with fears of a recession, forced management to lower their full-year forecasts, though the revised forecasts are still above expectations. The other setback was the decline in beer, which slowed quarter-over-quarter due to headwinds that developed late in the third quarter, primarily the need to raise prices more than usual due to inflation. That said, management expects the impact of price increases to diminish in the coming months and expects exhaustion trends to normalize further by fiscal 2024. If exhaustion growth picks up in the coming months, stocks should recover quickly. In addition to signs of sustained demand, we take comfort in Constellation’s strong cash generation and ability to raise prices while gaining market share. Cash is king and that is all the more true against an uncertain economic background. While today’s market reaction is obviously not what we like to see, we think it is a buying opportunity. In addition, the company is now more owned than ever before by common stockholders thanks to the recent elimination of the dual-class shareholding structure. However, given our expectations that the Federal Reserve will continue to raise interest rates in the first half of 2023, along with management’s lowered forecast, we are lowering our price target from $300 to $260 per share. Operating Results Beer sales of $1.89 billion, up 8% year-over-year, beat analyst expectations of $1.82 billion. Beer operating income came in at $710 million, missing the consensus estimate of $736 million. The segment’s operating margin took a hit of 380 basis points compared to last year, falling to 37.5%, due to an increase in raw material, packaging and logistics costs. In addition, beer shipments to distributors increased 2.7% year-over-year, while attrition, which represents shipments from US domestic distributors to retail customers, increased 5.7% due to the strength of the Modelo Especial beer brand. Constellation was the top market share gainer in the U.S. beer market for the sixth straight quarter, management said Thursday, adding that it now owns 5 of the top 15 growing high-end brands in the market. Modelo Especial remains the fastest growing beer by sales in the US Meanwhile, wine and spirits sales were $544.6 million, down 4% year-over-year and below analyst expectations of $565 million. Operating income of $134.8 million was also a bit short compared to the $141 million expected by Wall Street. The segment’s operating margin contracted 60 basis points to 24.8% due to lower shipment volumes, higher transportation costs and an increase in offset costs. Wine and spirits shipments were down 14.8% year-on-year, while depletions were down 5.6% year-over-year. Looking ahead, excluding Canopy, management now expects consolidated earnings of $11 per share to $11.20 per share for the full fiscal year. That’s lower than the $11.20 to $11.60 per share in the prior quarter, but still higher than analysts’ forecasts of $10.98 per share. This guidance assumes beer sales growth of 9% to 10% and operating profit growth of 4% to 5%. The interest cost guidance was increased to a range of $390 million to $400 million, up from an earlier guidance of $360 million to $370 million. The increase in debt was due to additional cash required for the class B elimination payout. In addition, operating cash flow is still expected to be between $2.6 billion and $2.8 billion. Excluding capital expenditures of $1.1 billion to $1.2 billion, the free cash flow forecast comes in at between $1.5 billion and $1.6 billion, up from the previous range of $1. 3 billion to $1.4 billion. Management said it expected inflation to remain above historical trends through fiscal 2024, in the high single digit range. (Jim Cramer’s Charitable Trust is long STZ. See here for a full list of the shares.) As a subscriber to the TBEN Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. 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Corona beer, owned by Constellation Brands.
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Producer of alcoholic beverages Constellation Brands (STZ) reported mixed results for the third quarter of 2023 on Thursday before the opening bell. While the results fell short of our expectations, we see the subsequent fall in the Corona beer maker’s share price as an opportunity for investors to buy up the shares .
