Constellation Brands Continues to Impress Investors

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In this Industry Focus segment, we look at Constellation Brands' (NYSE: STZ) fiscal second quarter 2018 earnings, reviewing significant items from the quarter, including the balance of its wine, spirits, and beer categories. To learn more about this fast-growing beverage company, already up nearly 40% year to date, just click below.

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A full transcript follows the video.

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This video was recorded on Oct. 10, 2017.

Vincent Shen: We have Constellation Brands. That's ticker STZ. The company reported its fiscal second quarter results on Oct. 5. Shares popped about 4% to 5% following the release. Looking out further, Constellation is actually up over 21% in the past year and almost 500% in the past five years, easily beating out the broad S&P 500 and also its alcoholic beverage peers. Asit, can you give us a rundown of the latest quarter and some of the big takeaways that jumped out to you that are really driving such impressive numbers for the company?

Asit Sharma: In this latest quarter, you mentioned the company grew revenue 3%. That's not a lot of revenue growth. However, part of that was, the company sold its Canadian wine business last year, which was a slow growth part of its revenue stream. So it let go of some revenue, but its beer business managed to grow 13%. So that made up for a lot of that difference. The company, as of its latest quarter, is about two-third committed to beer revenue and one-third wine and spirits. And what we saw in this most recent quarter was not just very good growth on the beer side, which we'll talk about in just a moment but also growth in the wine and spirits business, even though it let go of the Canadian wine business. Depletions were up 5%.

Now for listeners, I want to read to you a definition of what depletion is. You might hear us talk about this term sometimes on Industry Focus. Hats off to Rich Smith. If you were to google "beer depletion", Rich Smith, who's a colleague of ours, longtime Fool writer, wrote an article several years ago, it must have been five years ago, and his article comes up as one of the first search results, because he's given such a great definition. It "refers to the rate at which beer, already shipped from a producer like Boston Beer to a distributor leaves the distributor's warehouse en route to end users, i.e. drinkers." So here, we're talking about wine. The Constellation Brands wine business saw depletions of 5% depletion growth. That simply means that distributors are sending more wine to their own retail outlets at that rate of growth of 5%. So we always try to track two things: how much is the company actually selling, and how much are the distributors selling? And depletions gives you that number. So, positive sign there. I like that very much because the beer business is really driving Constellation forward. So if the wine and spirits business is also growing, it takes some of the pressure off that concentration. Vince, to flip it back to you, let's talk a little bit about what beer has meant to Constellation Brands over the last five years or so.

Shen: It's the most significant part of the business. When I checked, I think it was about 60% of their top line. Keep in mind that Constellation very proudly says that they lead the high end of the U.S. beer market. This is powered significantly by their imported Mexican brand portfolio. That includes big names like Corona, Modelo, Pacifico, Corona being the biggest imported brand, while Modelo is the fastest-growing. The company said in the last quarter that its beer portfolio alone drove 60% of the growth in the premium U.S. beer market.

On top of that, they're also expanding into some craft and specialty beers, as we've seen a lot of the big brewing companies have done. They've done that through acquisitions, much like their competitors. Their craft beer portfolio now includes also Ballast Point Brewing, which they acquired two years ago for $1 billion, and Funky Buddha, which is the latest recent addition. This is also an interesting case of, while that imported portfolio is very large and doing very well, very strong, craft was also kind of the shooting star for a long time for the beer industry. But several of the megabrewers are probably coming to regret the price tags that they ended up paying in that race to acquire all these craft breweries. Constellation itself took a $90 million impairment charge during the quarter on Ballast Point, and I would say that brand is probably no longer the focus it once was for the company, especially when you consider that the Mexican imports like Modelo and Corona are driving so much growth and winning shelf space with retailers. And they're taking that space not only from the big domestic brands but also from some craft names as well.

In terms of specific plans they have for this recent Funky Buddha acquisition, I thought it was interesting to note during the latest earnings call, management does speak to how they're going to try to take a more "professional approach" to growing the brand. So they're going to stick to certain key tenets, like focusing on a handful of key product offerings rather than expanding with a bunch of products and seeing what resonates with customers. They're also going to try to consolidate the distribution network and not expand geographically, because Funky Buddha is best known in Florida, before awareness of the brand itself has actually spread enough to sustain their expansion efforts.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool has a disclosure policy.