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What Constellation Brands Wants You to Know

Investors' first impressions of Constellation Brands' (NYSE: STZ) fiscal third-quarter results weren't positive, as Wall Street chose to focus on its disappointing short-term earnings outlook. Specifically, the alcoholic beverage giant said struggles in its wine and spirits segment, plus some extra costs related to its Canopy Growth (NYSE: CGC) investment, will lead to slower profit growth than it had predicted back in October.

Yet there was much more to this report than just the headline sales and profit numbers. Below, we'll look at a few highlights from the conference call that CEO Rob Sands and his team held with investors to put those metrics into perspective along with Constellation's wider growth ambitions.

Image source: Getty Images.

Market share updates

Corona Premier, Corona Familiar, and Modelo Especial achieved winning spots as the top three high-end U.S. beer industry share gainers for the quarter while Constellation's overall beer business was the most significant share gainer in the U.S. beer market during this time frame.
-- Chief Operating Officer Bill Newlands

The beer business is still firing on all cylinders, with shipment volume jumping 14% on strength in mainstay brands like Modelo Especial and Corona Extra, as well as in its recently introduced Corona Premier. The success of that launch is especially good news, management explained, because it gives the company a powerful tool to attack the huge light beer market that's long been dominated by the likes of Anheuser-Busch InBev.

On the other hand, the wine and spirits segment shrank to mark a worsening from the prior quarter's slight increase. Management had hoped that innovative releases and extra marketing support would produce better results, but these initiatives didn't pan out. "We're disappointed with the performance of our wine and spirits business," Newlands said, "as we're facing challenges at the low [price] end of the portfolio."

Cannabis reaching new highs

We believe the emerging cannabis space represents one of the most significant global growth opportunities of the next decade, and frankly, our lifetime. An opportunity that is opening up much more rapidly than originally anticipated.
-- Newlands

The 30%-plus stake that Constellation Brands owns of Canopy Growth injects some uncertainty into its short-term earnings. The investment value will change with Canopy's shifting share prices, for example, leading to lots of non-cash charges tied to this volatile stock.

And while the path of the new recreational cannabis industry's development is highly uncertain, executives say they're gaining confidence that this partnership will ultimately be a big win for Constellation Brands shareholders. As support for that bullish reading, executives cited the recent passage of the U.S. farm bill, which opens the door for the production of industrial hemp, including cannabidiol. Canopy Growth plans to be a major player in that emerging market.

Cash returns are rising

Our cash generation profile is strong as we expect our business to produce over $2 billion of operating cash flow annually. This positions us to quickly delever back into our targeted leverage range and return cash to our shareholders.
-- Chief Financial Officer David Klein

Several positive trends point to spiking cash returns to shareholders over the next few years. The company is wrapping up the massive investment project in its Mexican brewery network, for one, and that spending has lifted capacity high enough to easily meet beer demand for the foreseeable future. Robust earnings and free cash flow should allow management to quickly pay down the debt it took on to fund the Canopy Growth purchases, too.

While still investing in growth initiatives, especially those aimed at extending the beer business's market share winning streak, Constellation Brands believes it can return $4.5 billion -- representing about three-quarters of its operating cash flow -- to investors through dividends and stock buybacks over the next three years. "We believe that Constellation provides the best combination of growth and cash returns to shareholders within the [consumer packaged goods] space," Klein said. Investors' initial reaction to the report implied they weren't sold on that idea. But the real test will be whether the company's earnings power can keep expanding at a double-digit rate in 2019 and beyond, just as it has for each of the last five fiscal years.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends BUD and Constellation Brands. The Motley Fool has a disclosure policy.

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