Will the Constellation Brands share price feel merrier post-earnings?

While the Constellation Brands [STZ] share price is down 1.8% in the year-to-date at $213.02 as of 4 October close, it has risen 0.5% in the past month ahead of its second-quarter earnings release on 6 October.

The Constellation Brands share price has climbed 11.5% over the last 12-months, underperforming the market. In the same period, the S&P 500 has risen 27.7%. Meanwhile, in comparison, its rival Boston Beer Company’s [SAM] share price has declined by 42.8% in the same period, while Diageo [DEO] has climbed 37.9%.

Constellation Brands’ share price loses steam

Shares in the company started 2021 positively, as shoppers stocked their pantries with beer and wine to help get through the stresses of ongoing COVID-19 lockdowns.

But by market close on 4 March, its shares had dropped to $211.15, despite announcing a 6% rise in fourth-quarter sales to $1.9bn in its earnings announcement a month prior. Investors appeared to be spooked by the company’s lower margins, which stemmed from higher marketing costs and wages, as well as lower shipment volumes of wine.

Further concerns over rising costs, inflation, and new variants of COVID-19, particularly the Delta variant, also rocked confidence, despite bars and other venues re-opening.

Constellation Brands has a 4.91% weighting in the Invesco Dynamic Food & Beverage ETF [PBJ], which has risen 26.7% over the last 12-months, and a 2.36% weighting in the First Trust Consumer Staples ETF [FXG], which has climbed 15.9%..

Constellation Brands' Q1 earnings fall short

In the first quarter, Constellation Brands reported revenues of $2.03bn compared to analysts’ estimates of $2.05bn. Earnings per share came in at $2.33, just off Zacks’ consensus estimate of $2.35.

A modest 3% year-on-year net sales increase was thanks to robust customer demand for beer — in particular, its Modelo and Corona brands — boosted by big events such as the Cinco de Mayo holidays in Mexico.

Its shares fell from $233.89 at the close on 30 June — the day of the announcement — to $231.42 at the close on 2 July and $222.02 at the close on 19 July.

“We’re emerging from the pandemic in a position of strength as we kick off our fiscal year. Our beer business delivered double-digit net sales and profit growth, and our Wine and Spirits Business is poised to drive accelerated growth and profitability from its portfolio of high-end, industry-leading brands,” Bill Newlands, Constellation’s president and CEO, said.

“We’re emerging from the pandemic in a position of strength as we kick off our fiscal year. Our beer business delivered double-digit net sales and profit growth, and our Wine and Spirits Business is poised to drive accelerated growth and profitability from its portfolio of high-end, industry-leading brands” - Bill Newlands, Constellation’s president & CEO

What can investors expect for Constellation’s upcoming earnings?

Zacks estimates that second-quarter earnings will come in at $2.84, up 2.9% year-on-year, with revenues of $2.34bn, representing a 3.7% year-on-year increase.

Analysts polled by the firm believe Constellation Brands will have benefitted from growth in demand for beer. It also expects it to benefit from its wine and spirits premiumisation strategy and its Corona Hard Seltzer brand as people look at alternative alcoholic drinks.

It did, however, identify challenges such as global supply-chain strain, which is expected to have led to product shortages and rising freight costs.

Analysts will also keep an eye out for any more information on its plan to invest $800m to continue the expansion of its production facilities in Mexico, where it hopes to add 15 million hectoliters in capacity between 2023 and 2025.

Constellation believes the growing Hispanic demographic in the US will help keep up demand for Corona and Modelo, while the growth of its premium wine and spirit brands, such as brands Meiomi and Prisoner Unshackled, is also seeing strong demand. This, it hopes, will boost operating margins.

There will also be much interest in updates on the company’s work with Canopy Growth [CGC], the cannabis company in which it owns a stake, and the potential for US federal legalisation of the drug.

Constellation believes there will be a worldwide addressable market for cannabis products, such as drinks, worth $55bn by 2023.

In addition, there will be a focus on the group’s share repurchasing plan. It committed to $500m in share repurchases in the second quarter as part of a plan to give back $2.5bn to shareholders over the next two years.

Analysts are bullish, with Credit Suisse rating it as a top pick in alcoholic beverages, with an outperform rating and a $275 target price.

Morgan Stanley analyst Dara Mohsenian has a $266 price target. “We view valuation as attractive post what we view as an unwarranted pullback recently and ahead of an expected rebound in beer depletion growth … as lingering production supply issues dissipate,” he said. “We are encouraged by improving short-term tracked channel market-share trends and underlying demand strength … with an on-premises recovery.”