What to Watch When Constellation Brands Inc. Posts Earnings This Week

By Demitrios Kalogeropoulos Markets Fool.com

Beer and wine giant Constellation Brands (NYSE: STZ) will announce its fiscal fourth-quarter earnings results on Thursday, April 6. Its stock has trailed the market over the past 12 months but outperfomed broader indexes over a longer time horizon. In the past five years, Constellation Brands has gained 600%, compared to an approximately 70% increase for the S&P 500.

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Below, we'll take a close look at three major indicators that investors should watch on Thursday as signs that the company's long-term momentum is on track.

Image source: Getty Images.

Volume

Sales grew at a double-digit pace through the first three quarters of the year, and the biggest contributor to that progress has been surging beer sales. Constellation Brands owns the rights to Corona, the most popular imported beer in the U.S., in addition to a few other hit franchises such as Modelo and Pacifico. Together these brands make the company the leader in the premium imported-beer segment.

Beer sales rose 16% last quarter (compared to a 5% boost for wine) as the company soaked up more market share from rivals like Anheuser-Busch InBev, which posted a slight decline in its global beer volume in early March but also enjoyed strong growth in its Stella Artois U.S. import. InBev is targeting the premium beer segment that has produced some of the best gains for Constellation Brands, and this week, investors will get an update on just how well those brands are holding up to the increased competition.

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Constellation Brands executives are projecting the beer business to expand by between 16% and 17% for the fiscal year, while the wine and spirits segments will rise at about half that pace.

Profitability

As encouraging as market share gains can be, they're even more exciting when paired with rising average prices. And that's exactly what Constellation Brands has achieved lately. Despite increased marketing spending, earnings bounced higher by 12% last quarter as operating margin ticked up 40 basis points to 29.4% of sales.

Executives plan to keep growing profitability, which already matches AB InBev's comparable figure. To that end, CEO Rob Sands and his team recently sold off their Canadian wine business as part of that strategy, as Sands put it, "to focus on premium, margin accretive, growth opportunities."

Spending priorities

Image source: Constellation Brands.

Unlike its massive global rivals, Constellation Brands has more room to drive its results through acquisitions. Its $3 billion, 2013 deal with AB InBev for the U.S. rights to the Corona and Modelo brands proved pivotal to its recent growth. While opportunities of that magnitude don't come along very often, management has kept up that strategy with several smaller purchases, including last quarter's acquisition of Charles Smith Wines and the High West Distillery.

Constellation Brands is also shelling out billions expanding its production capacity -- especially in the premium Mexican beer category -- and those investments should begin paying dividends over the next few years through steadily rising sales volumes and improving operating margin.

The company will likely provide a detailed outlook for fiscal 2017 that includes projections for sales and profits, as well as operating cash flow and capital expenditures. An aggressive volume forecast that predicts another year of gains in the mid-single digits should help put some bullish momentum behind the stock. Alternatively, if Constellation Brands sees sales or profit growth slowing due to rising competitive threats, the recent slowdown will likely continue.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.