BF.B Brown Forman Corp

We have maintained our long-term ‘Neutral’ recommendation on Constellation Brands Inc. (STZ) with a target price of $21.00 per share. Moreover, the company has a Zacks #2 Rank, implying a short-term ‘Buy’ rating on the stock.

Constellation Brands is the largest wine company in the world, commanding a dominant position in the premium wine segment in the U.S. The company is also a leading producer of wines in Canada and New Zealand. This provides a competitive edge to the company and bolsters its well-established position in the market.

Moreover, Constellation Brands delivered a strong second-quarter 2012 result with earnings increasing approximately 79.0% to 77 cents per share compared with the prior-period earnings of 43 cents, primarily resulting from a lower tax rate. Quarterly earnings also surpassed the Zacks Consensus Estimate of 66 cents per share. Bolstered by better-than-expected result, the company now expects earnings in fiscal 2012 to be in the range of $2.00 to $2.10 per share, up from its previous guidance range of $1.90 to $2.00, reflecting benefits from share repurchase and change in tax rate guidance to 27% from 29% forecasted earlier.

Further, the recent stake sale in Australian and U.K. businesses will help the company to focus on organic growth of its brand portfolio, margin improvement, return on invested capital and free cash flow. During the last two years, the Australian and U.K. businesses were facing challenging market conditions, which were no longer consistent with Constellation’s business strategy. Moreover, both the companies have joined hands to distribute and supply each other’s products globally.

Additionally, management has reduced leverage by deploying operating cash to pay down debt. Long-term debt at the end of the second quarter of fiscal 2012 decreased $402.0 million to $2,734.7 million from the debt level at the end of fiscal 2011. Consequently, interest expense also declined 15.5% year over year to $42.5 million in the second quarter.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively affect their discretionary spending, and in turn, the company’s growth and profitability.

Further,distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of respective countries. The effect of any excise tax increase in future may have an adverse effect on Constellation Brands’ financial performance.

Above all, the company faces intense competition from other well-established players in the industry, including Beam Inc. (BEAM), Brown-Forman Corporation – B (BF.B) and Diageo plc (DEO). Moreover, Constellation Brands also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

 
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CONSTELLATN BRD (STZ): Free Stock Analysis Report
 
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