The Best Call In Alcohol: Constellation Brands

Capitalizing on an expansion in beer margins, Constellation Brands, Inc. STZ is expecting to continue its momentum. Thus, Wells Fargo senior analyst Bonnie Herzog reiterated her Outperform rating and raised her price target from $205 to $215.

Beer, Wine Margin Expansion Generates Top-Line Growth

These expansions helped drive first-quarter EPS to beat the consensus by $0.36 and pushed management to raise its 2018 EPS guidance.

Herzog still believes 2018 guidance is extremely conservative and specifically highlighted four reasons that led her to this conclusion:

1. Shipment volume should accelerate in Q2.
2. Operative leverage should continue to grow, driven by Obregon’s production facility.
3. Constellation should continue to see strong growth across its core brands.
4. Constellation is earning more shelf space according to Herzog’s industry contacts.

“With strong earnings growth and conservative cash flow targets, we believe STZ could have the capacity to accelerate cash returned to shareholders prior to the significant windfall coming once STZ’s beer CapEx plans are complete. STZ remains our top beverage stock pick, as we absolutely agree with CEO Sands that STZ’s stock is “still the best buy in alcohol,” Herzog said (check out Herzog's track record).

Constellation Has A Ton Of Cash, Will Start Using It Soon

“Beginning next year, STZ coffers should begin to rapidly refill as it completes its beer expansion investments and it takes on new debt to maintain its target 3.5x leverage. We estimate by FY21 STZ will have over $5bn in excess annual cash flow to be used for either accelerated share repurchases or through M&A,” Herzog noted.

She went on to say a major deal seems unlikely, and that she expects Constellation to return the excess amount of cash to shareholders.

Overall, with favorable industry trends, and a strong portfolio, among several other factors, it is hard not to like Constellation in 2017.

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