Constellation Brands Profits Are on the House

NEW YORK (TheStreet) -- There's nothing Wall Street hates more than uncertainty. While some companies are successful after having gone through periods of transition, the process can be unsettling for investors, especially when stock valuations are in disarray.

While Constellation Brands (STZ), known for its fine wine and spirits, has executed well over the past couple of years by selling off its less-appealing alcohol brands, it has always had issues about weak organic growth. Not to mention, management has gone through periods of acquiring rivals that have failed to pay off for shareholders.

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On the heels of better-than-expected third-quarter results (including an 88% surge in revenue), the vodka behemoth satisfied the Street's thirst for growth. With earnings-per-share of $1.10 per share, 20% ahead of estimates, credit management for making the right decision in keeping higher-end brands like Negro Modelo and Svedka.

The advantages that management envisioned upon the acquisition of Grupo Modelo's distribution rights are certainly beginning to pay off. With cash flows surging 61% year over year, I believe it's only a matter of time before the Street comes to its senses and stop overstating the merits of organic growth -- at least with this story.

Not to downplay the metric, but as with other beverage giants such as Coca-Cola (KO) and Anheuser-Busch InBev (BUD) that have taken the similar acquisitive routes, Constellation Brands, from its deals, not only has become a cash-generating machine, but management has also produced impressive returns on capital.

Let's not forget, analysts weren't completely sold on several of these decisions, including the company's aggressiveness in emerging markets. But as I've said on more than one occasion, management didn't have much choice. And it wasn't as if rivals like Heineken (HINKF) were generating better volumes, either.


As the stock surged as much as 12% on Wednesday, investors are now toasting the high life. The company's management, which I've always believed to be underrated, is far from completing what they've started. CEO Bob Ryder told investors that the company plans on reinvesting its profits back into future growth. While some investors were hoping for a dividend, I don't believe now would have been the appropriate time.

With momentum firmly on its side, it would be foolish for management to succumb to the dividend pressure and waste numerous routes for improved long-term performance. And I can see the company benefiting from things like, say, brewery capital expansion. A move along those lines could lead to revenue growth and stronger profits as well. (To say nothing about improved margins that should come with capacity expansion.)

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If there are any concerns here, aside from any competitive pressures, it's that these shares have posted extraordinary gains over the twelve months, close to 120%. A lot of expectations are built into this performance. In other words, the "next round" is not guaranteed to be as bubbly.

This is where investors should seek better understanding of the complex dealings involving Grupo Modelo's brands in relation to Anheuser-Busch InBev. We shouldn't discount that there are several growth dynamics that are still at play here, not to mention the impressive revenue boost the company just enjoyed on account of the Grupo deal. What this means is that, given Constellation's ongoing restructuring efforts, one slipup is all it may take to end this party.

Management continues to remain upbeat, suggesting as much as 21% revenue growth for fiscal 2015. That's good news. It remains to be seen to what extent these targets will be reached. For now, investors are toasting the company's profitability and impressive cash flows. And I wouldn't bet against this stock once again outperforming the market in 2014.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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