Shares of Constellation Brands have been on a rampage. Year to date the stock is up almost 9%, and over the past two years it is up 75%. The company has been aggressively expanding into the Mexican beer market and it seems the demand for its beer continues to outpace the company's ability to ship.
Over two years ago, Constellation acquired the rights to 10 Mexican beer brands from Anheuser-Busch InBev (BUD) - Get Report . The deal turned Constellation into the third-largest brewer in the world and perfectly positioned the company as demand for its brands soared.
In early April, Constellation reported its fourth- quarter and fiscal 2016 year-end earnings. Fourth-quarter sales rose 14.1%. Beer sales were up 22% and wine was up 8%. Beer volumes were up 16% even on a 5% price hike.
Investors closely watch the beer depletion number. Beer depletions were up 13%, just shy of the 16% shipment number. In other words, for this quarter, at least, the company was able to catch up to demand. In the third quarter, depletion rose 16.5% and shipments were up just 6.6%, which indicated that demand outstripped supply.
When those numbers came out in early April, the stock seemed to stall out. But I think supply caught up to demand last quarter because the company was able to push through a 5% price increase. Shipment and depletion numbers could flop back and forth all year, but it is clear the company has too little manufacturing capacity.
Despite spirit sales falling 4.2%, wine sales were up 8% last quarter. Going forward, wine and spirits sales are expected to grow in the low- to mid-single digits in fiscal 2017 and produce operating profits in the mid- to high-single digits.
Manufacturing beer, wine and sprits is a good business. Constellation ended last year with consolidated operating margins of 28.5%. Beer operating margins rose 24%, driven by lower operating costs and favorable pricing.
Last year, Constellation announced it would construct a new brewery in Mexicali, Mexico, near California, its largest market. California accounts for about 25% of beer volume. The company plans to complete the first half of the plant construction by the end of 2019. Free cash flow is expected to be down as much as 22% to $292 million as the company ramps up construction. Next year, free cash flow will bounce back as construction spending winds down.
For the first quarter, analysts are forecasting total sales of $1.84 billion, with beer sales accounting for $1.1 billion of the total. Earnings could be as high as $1.52 per share.
Trading at a forward price-to-earnings ratio of 21.9 times estimates, the stock isn't cheap. But in my opinion, Constellation Brands should continue to grind higher.
The company has solid low-double-digit revenue growth (11% for fiscal year 2017) and mid-teens (14%) earnings-per-share growth. The company is expected to earn $6.22 per share this year. Operating margins continue to expand: operating margin was 26.3% at the end of fiscal 2015 and is forecasted at almost 30% next year.
I think the stars will align for Constellation Brands, and by this time next year, investors will be celebrating (responsibly).
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.