STZ

Publicly traded companies mentioned herein: Brown-Forman Corp (BF/B), Canopy Growth Corp (WEED CN), Constellation Brands Inc (STZ), Diageo plc (DEO)

Highlights

The presenter is long shares of Constellation Brands Inc (STZ), which owns beer brands such as Modelo, Corona, and Pacifico, as well as wine and spirits brands including Kim Crawford, Robert Mondavi Winery, and High West Distillery. STZ’s beer breweries are located in Mexico and the US, and the segment accounts for 67% of total revenue and 75% EBIT, while wine and spirits represent the remaining portions of revenue and EBIT. The stock used to be one of the most popular names in the consumer space, as it was a relatively clean beat-and-raise story. Its beer brands were experiencing strong growth, the company was expanding its brewing capacity to support that growth, and management executed on backward integration by forming a joint venture with Owens-Illinois in 2014 to operate its own glass facility. Additionally, STZ’s beer margins were expanding, which allowed the segment’s EBIT to grow ~20% annually while segment revenues grew 10% – 15%. In the last three years, however, poor capital allocation, complicated divestiture processes, and more recent impacts from COVID-19 have led to downward EPS revisions and a messy story. The stock has been dead money over this timeframe, and the current ~$215 share price is still ~10% below its April 2018 peak. The presenter now considers STZ a timely investment due to his belief that the story is getting cleaned up, which could allow earnings revisions to inflect positively and lead to the stock rerating. For FY2023, which ends in February 2023, he expects EPS of $13 – $13.50 from the core business, and maintains the current ~22x forward earnings multiple, yielding a price target on the core business of ~$290 per share just over a year from now. He also gives STZ a credit of $10 per share for its stake in Canopy Growth Corp (WEED CN).