Earnings Scorecard: Constellation Brands - Analyst Blog

Constellation Brands Inc. (STZ), the largest wine company in the world, posted its first-quarter 2012 results. Street analysts had nearly a week to ponder the news. In the subsequent paragraphs, we cover the recent earnings announcement, analysts' estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Quarterly Review

On June 30, 2011, Constellation Brands delivered an adjusted EPS of 39 cents in its first quarter ended May 31, 2011, outperforming the Zacks Consensus Estimate of 37 cents and improving by a penny from the prior-year quarters' earnings of 38 cents.

Both the reported and prior-year quarter's EPS excluded special items like inventory step-up costs, net gains/losses from its strategic business realignment initiatives and other items. Netting these items, the company reported EPS of 35 cents versus 22 cents in the year-ago quarter.

Sales in the quarter plummeted 19.3% to $635.3 million from the year-ago quarter. An organic constant currency net sales increase of 2.0% was more than offset by divestitures of the Australian and U.K. wine business and U.K. cider business. However, sales for the quarter surpassed the Zacks Consensus Estimate of $613.0 million.

Management's Guidance for 2012

The company expects its fiscal 2012 EPS to be in the band of $1.90 to $2.00. The guidance factors in an interest expense expectation range from approximately $180 to $190 million, an approximate tax rate of 29% and weighted average diluted shares outstanding of approximately 216 million.

Constellation Brands expects to generate $685 million to $745 million of cash from operations in fiscal 2012 and deploy $85 million to $95 million toward capital expenditure. Accordingly, the company anticipates free cash flow in the range of $600 to $650 million in fiscal 2012.

(Read our full coverage on this earnings report: Constellation Shines in 1Q)

Agreement of Analysts

Estimate revision trends for the upcoming second-quarter 2012 portrayed positive sentiments among most of the analysts. Over the last 7 days, 7 out of 8 analysts revisited their estimates and all have adjusted it in upward direction.

While for third-quarter 2012, 7 analysts revisited their estimates and all have downgraded their estimates, reflecting a negative sentiment among the analysts.

Moreover, for full fiscals 2012 and 2013, most of the analysts have negative sentiments. For fiscal 2012, 5 out of 8 analysts revisited their estimates, of which 3 downgraded and 2 upgraded their estimates. Similarly, for fiscal 2013, 2 out of 3 analysts, who revisited their estimates have lowered it and the remaining 1 has adjusted it in upward direction.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Constellation Brands depicts an optimistic outlook for the upcoming second-quarter 2012 and pessimistic outlook for the third quarter of 2012 and for full fiscals 2012 and 2013. The magnitude of estimate revision for the second quarter of 2012 has been increased by 6 cents to 65 cents per share.

Over the last 7 days, estimated earnings for third quarter of fiscal 2012 have been decreased by 9 cents to 57 cents per share. While for fiscal years 2012 and 2013, estimated earnings has been lowered by 2 and 1 cent to $1.96 and $2.15, respectively, over the last seven days.

Our Recommendation

Constellation Brands is the largest wine company in the world with a strong portfolio of premium wine brands complemented by spirits, imported beer and other select beverage alcohol products. The company has operations in five core markets of the U.S., Canada, the U.K., Australia and New Zealand.

The company stated that its operating results were under three reporting segments: Constellation Wines (includes branded wines, spirits and other), Crown imports (includes imported beer) and Corporate operations.

Constellation benefited from the U.S. distributor consolidation initiatives and renewed focus on building and promoting brands. Management stated that these efforts enabled the company's top 15 U.S. wine brands to expand at a rate faster than the market and account for a significant portion of U.S. wine profitability.

Constellation Brands competes with Foster's Group Ltd. (FBRWY) and privately held E. & J. Gallo Winery and Jackson Family Wines.

Currently, Constellation Brands holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. However, in the long term, we have a Neutral recommendation on the stock.