Weekly Stock Report

Weekly Stock Report

12/21/2018

Company name: Constellation Brands (STZ)(STZ.B)

Current stock Price: $165.09

Dividend Yield: 1.65%

Z- Score: 3.2 safe zone and strong

F-Score: 7 safe and strong

I go out a lot and when I am out I notice what people are ordering. One drink always on the drink menu and at every Latin restaurant is Carona. I figured Carona is good enough to drink but how about whether to invest in as a company? Corona is owned by Constellation Brands, lets dig in.

Constellation Brands Inc is in the beverage industry and its core products are alcoholic drinks such as beers, wines and other spirits.

Some of the top competitors in the service industry are:

1. Boston Beer (SAM)-selling low alcohol beverages, markets Twisted Tea and Angry Orchard ciders.
   
   2.Molson Coors Brewing (TAP)- brewing activities brands Carling, Coors Light, Molson Canadian and Staropramen, as well as craft and specialty beers such as Blue Moon.
   
   3.Diageo (DEO)-Diageo PLC beverage industry, brands Johnnie Walker, Crown Royal, J&B, Buchanan’s and Windsor whiskies, Smirnoff, Ciroc and Ketel One vodkas.
   
   Is Constellation good for society and what are their values?
   
   Constellation invest in entrepreneurs who want to grow their business with the support of Constellation’s investment, mentorship and involvement. Named best place to work by LGBQT equality. News week green rating of 171 of 500 in environmental performances.
   
   Some of the company’s key values: People, customer focus, entrepreneurship, quality, and integrity.
   
   Other reasons to become an investor:
   
2. Fortune 500 company been in business for 70 years.
   
3. People love beer, wine and spirits for centuries.
   
4. 1st large company with investments into the beginning stages of the cannabis industry.
   
5. Constellation has a Brand Moat which is trusted.
   
   The main advantage Constellation has is having consumers that are loyal to a brand.
   
   The brand should be around for a long time because it owns the third largest beer brand in the US. It is the worlds leading wine company with over 100 wines. Constellation also has partnership with Owens-Illinois (world largest glass manufacture). The company also has steady long term 10 years and short term 3 years growth rates.
   
   Book Value (BVPS): 11 and 12%
   
   Earning (EPS): 62 and 40%
   
   Operation Cash (OCPS) 14 and 21%
   
   Sales: 8 and 10%
   
   CEO Robert Sands has been the CEO since 2007. Predecessor’s older brother and his father who started the business. Named executive of the year by Marketwatch Industries and Beverage Industries Magazine. Also name 100 best performing CEOs by Harvard Business Review. He will be stepping down in March of 2019 and remain on the board. He will transition his responsibilities to Bill Newlands, current President and COO. Newlands, joined company in 2015 and has been in the industry since 1996.
   
   You can trust the company with your money because the firm has historically acted in the best interests of shareholders, as evidenced by its excess returns on invested capital. Also, the board has 11 members who are elected annually which 9 of them members are independent. The return on equity has been growing by double digits and increasing and the return on invested capital has been growing double digits but not increasing. Management has kept the debt level to a point where it can be paid off in four years. Debt has been decreasing last three years however may go up due to new investment in the cannabis space.
   
   Some risks that I am concerned with:
   
6. Unfamiliar with cannabis sector not in business model. However, Constellation brands is spending a lot of money on research and development. Company believes cannabis related product have the potential to disrupt about $500 billion a year in various business beyond smoking pot to include: Alcohol, sleep aids, drugs for lack of appetite, sport drinks (anti-inflammatory), medicine, and pet care.
   
7. More microbreweries and small local distilleries opening. I would consider that the company claims, “40% of the firm’s sales are to Hispanic consumers and the population of Hispanic legal drinking age adults is expected to grow at a 3% compound rate through 2025. We estimate around a third of these consumers opt for imported beer, versus one-fifth for non-Hispanic consumers, implying sustained volume growth for brands like Corona and Modelo.”
   
8. Cost advantages lag those of the largest breweries, i.e. Inbev gross margin 62%,compared to Constellation at 54%. Constellation is constantly trying to become more efficient. One example is the Nava glass plant, which is expected to supply around 60% of the firm’s glass needs for its adjacent brewery when fully operational with five furnaces (expected in 2019), should also help lower cost of goods sold (over one fourth of which is for glass).
   
   How much would I pay for this company today?
   
   Due to the size of the company and past growth rates I would use a conservative growth rate of 10%
   
   At today’s trailing twelve month Earning Per Share (EPS) of 16.70 at a growth of 10% in 5 years would $26.90. Today price to earnings (PE) ratio is 9.87 and analyst future PE estimate of 16.18. I will use the average of the two PE ratios and come up with 13.02. Multiplying these numbers 13.02 x 26.90, I get a future five-year price of $339.69. At the current price of $165 that gives you over 15% return.
   
   I would also keep an eye on the return on invested capital and make sure it continues to grow at double digits and does not decrease. Also wait for Newland’s CEO letter to shareholders, hopefully around March 1st, to see what he plans on doing to keep on growing.
   

Mr-Wallstreet