Beer Maker Constellation Brands’ Fiscal Q3 Earnings To Be Solid; Shares To Rally Further In 2021

New York-based Fortune 500 international beverage alcohol company Constellation Brands is expected to report a profit of $2.40 in fiscal third quarter, up from $2.14 per share seen in the same quarter a year ago, which would indicate a positive year-over-year growth rate of more than 12%.

The leading beverage alcohol company will report its financial results for its fiscal third quarter ended November 30, 2020, on Thursday, January 7, 2021, before the open of the U.S. markets.

“We believe the focus of Constellation Brands’ FQ3 EPS will be on accelerating and above consensus beer depletions to +8.3% y-o-y in FQ3 (vs. 5% in F1H21) with improving beer out-of-stocks, as well as a beer shipment recovery after the under-shipment in F1H21. We also expect an update on beer depletion trends in December, with solid U.S. scanner data trends but likely weakening on-premise trends with more on-premise restrictions, particularly in California (about a quarter of Constellation Brands’ volumes),” said Dara Mohsenian, equity analyst at Morgan Stanley.

“Additionally, we believe investors will focus on beer margins, which we believe could surprise to the upside in FQ3 (we are 20 bps above consensus on beer margins and 2.3% above consensus on beer profit) and in F2H21, with Constellation Brands full year FY21 guidance of flat beer margins implying -160 bps of y-o-y margin declines in H2, with our estimates above guidance at -20 bps y-o-y.”

It is worth noting that Constellation Brands said on Friday that the U.S. Federal Trade Commission approved the sale of the company’s lower-price wine and spirits portfolio to E. & J. Gallo Winery. The deal is slated to close the week of January 4, 2021.

Constellation Brands shares closed 0.35% higher at $218.21 on Wednesday; the stock is up about 15% so far in 2020.

Analyst Comments

“We expect investor focus with FQ3 EPS will likely be on beer depletion growth and the forward outlook, as well as beer margins, both of which we expect to be solid, and any early tone on the FY22 outlook. Our FQ3 EPS estimate is $2.41 (including Canopy equity income losses), or $2.60 excluding Canopy. We believe the $2.38 consensus estimate is not fully comparable given the inconsistency in consensus estimates on the inclusion of Canopy losses. We expect the market to be most focused on beer depletion trends and beer margins, and more importantly the outlook for FQ4 and any tone on FY22,” said Dara Mohsenian, equity analyst at Morgan Stanley.

“We forecast +14.4% y-o-y corporate Constellation Brands (STZ) organic sales growth in FQ3 on a +1.7% prior-year comparison driven by +22.1% organic topline growth in beer, due to an assumed a shipment catch-up in FQ3 (MSe of ~1,150 bps), after shipments were below depletions by ~1,750 bps in F1H21 due to production limitations at STZ’s Mexican production plants given government-mandated COVID-19 restrictions.”

Constellation Brands Stock Price Forecast

Fourteen analysts who offered stock ratings for Constellation Brands Sciences in the last three months forecast the average price in 12 months at $224.29 with a high forecast of $250.00 and a low forecast of $154.00. The average price target represents a 2.79% increase from the last price of $218.21. From those 14 equity analysts, ten rated “Buy”, three rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $240 with a high of $280 under a bull scenario and $138 under the worst-case scenario. The firm currently has an “Overweight” rating on the beverage alcohol company’s stock.

“Our $240 PT is based on $228/shr for core Constellation Brands (ex-Canopy) based on ~21.5x FY22e EPS plus ~$12/shr for Constellation Brands’ (STZ) Canopy investment (33% discount to market value). Our 21.5x target multiple is slightly below STZ’s ~22x last 3-year NTM P/E average,” Morgan Stanley’s Mohsenian added.

Several other analysts have also recently commented on the stock. Constellation Brands had its price target increased by stock analysts at JP Morgan to $248 from $218. The firm currently has an “overweight” rating on the stock. UBS Group increased their price objective to $238 from $220 and gave the company a “buy” rating. Citigroup increased their price objective to $209 from $200 and gave the company a “neutral” rating in October.

We think it is good to buy at the current level and target $250 as 100-day Moving Average, and 100-200-day MACD Oscillator signals a strong buying opportunity.

Upside and Downside Risks

Risks to Upside: Improving beer category growth trends, STZ beer market share upside, greater innovation incrementality (eg Corona Hard Seltzer), beer margin upside, FX, commodities, and upside from STZ’s Canopy stake – highlighted by Morgan Stanley.

Risks to Downside: Decelerating category growth trends, weaker STZ market share, competitive entries in beer, Canopy stock price downside, capital allocation risk, COVID-19 impact, and consumer trade-down in beer.

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