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Should You Buy It? Constellation Can Do

David Peltier

Constellation Brands(STZ Quote - Cramer on STZ - Stock Picks) investors have had reason to drown their sorrows in 2008. At Wednesday's closing price of $17.87, the stock is down some 25% year to date.

This is despite the fact that the wine-and-alcohol-producing company posted better-than-expected fiscal fourth-quarter (ended February) results April 3. Constellation earned 34 cents a share, which was 9 cents ahead of the consensus analyst estimate. Revenue fell 23% year over year to $884.4 million but also came in $11 million ahead of expectations.

The results exclude an $822 million charge taken to reflect lower wine prices in Australia and higher excise taxes in the U.K. Constellation is the world's largest wine producer by volume, with brands such as Robert Mondavi and Ravenswood. The company also imports beers such as Corona and Tsingtao into the U.S. and has a smaller spirits division.

At current levels, the stock is valued at 10.6 times expected 2009 earnings of $1.69 a share. That represents a 22% discount to the company's average valuation over the past decade and is also less than the 17% profit growth that Constellation is expected to deliver in fiscal 2009 (ended February).

With that in mind, I'm here to answer readers' questions: Should you buy it? Is Constellation Brands attractive to purchase at current levels, or could the stock leave investors with a hangover? Looking at value stocks is my bailiwick here at TheStreet.com, where I run the Value Investor service. (Click here for a free trial.)

Constellation has tried to grow its business through acquisitions in recent months. Last December, the company bought Fortune Brands'(FO Quote - Cramer on FO - Stock Picks) U.S. wine products for $885 million in cash.

This pushes Constellation's wine portfolio upscale, as the company in February also sold the majority of its brands that retail for less than $10. Constellation also acquired the Svedka vodka brand for $384 million in March 2007.

The company paid cash in both deals. While Constellation generated $376 million of free cash flow in fiscal 2008, it ended the most recent quarter with just $20.5 million of cash on the balance sheet; management financed the rest of the acquisitions with debt.

As a result, Constellation's total short-term and long-term debt rose by more than $1 billion year over year at the end of the February quarter, to $5.26 billion, or a hefty 52.5% of total capitalization. The company has $306 million of debt coming due in 2009, and its bonds are rated BB- by Standard & Poor's.

Constellation's competitors include Diageo(DEO Quote - Cramer on DEO - Stock Picks) and the privately held E&J Gallo and The Wine Group.

In addition to Constellation's lopsided balance sheet, some investors are leery that earnings can bounce back after a 14% decline in fiscal 2007 -- the only annual drop in the past decade.

But at current levels, the stock already appears to be pricing in some disappointing earnings during 2009. With that in mind, I believe that patient readers should buy Constellation Brands at current levels.

The company generates enough cash flow to keep its creditors at bay, and I believe the stock could trade up toward $24 in the coming quarters.

Constellation Brands is not included in TheStreet.com Value Investor model portfolio. David Peltier writes regularly about value stocks, such as Darden Restaurants(DRI Quote - Cramer on DRI - Stock Picks), UnitedHealth(UNH Quote - Cramer on UNH - Stock Picks) and Toll Brothers(TOL Quote - Cramer on TOL - Stock Picks), for TheStreet.com.