BF.B Brown Forman Corp

Constellation Brands Inc. (STZ), the largest wine company in the world, posted its fourth-quarter 2012 results last week on Thursday. Therefore, the covering analysts have had roughly a week to ponder the results. In the subsequent paragraphs, we will cover the recent earnings announcement, analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Review

Constellation Brands delivered adjusted EPS of 69 cents per share in the fourth quarter of fiscal 2012, surpassing the Zacks Consensus Estimate of 38 cents and surged nearly two-folds from the prior-year earnings of 35 cents. The year-over-year increase in the bottom line was primarily driven by benefits from negative tax rates and improved margins.

Sales in the quarter dropped 12.2% to $628.1 million from the year-ago quarter. The fall was due to the divestitures of the Australian and U.K. wine businesses, partially offset by improved sales in the North American business. Sales also missed the Zacks Consensus forecast of $633 million. The company’s North American organic constant currency net sales increased 5% driven by improved volume and favorable product mix.

Management Guidance for Fiscal 2013

The company expects fiscal 2013 adjusted EPS in the band of $1.93 to $2.03 per share compared with $2.34 in fiscal 2012. The guidance factors in an interest expense expectation in the range of approximately $210–$220 million, an approximate tax rate of 34% and weighted average diluted shares outstanding of approximately 185-190 million.

On a reported basis, the company expects earnings in the range of $1.89-$1.99 per share compared with $2.13 in fiscal 2012.

Moreover, the company anticipates generating free cash flow in the range of $425 million to $475 million.

(Read our full coverage on this earnings report: STZ’s EPS Up, Posts Record FCF)

Agreement of Analysts

The estimate revision trend for the first and second quarters of fiscal 2013 portrays negative sentiment among the analysts covering the stock. Over the last 7 days, 6 out of 8 analysts lowered their estimates for the first quarter with no movement in the opposite direction. Similarly, for the second quarter, 6 analysts lowered their estimates over the last 7 days.

For fiscal 2013, estimate revision trends show a negative sentiment among the analysts covering the stock. Over the last 7 days, 9 analysts cut their estimates for fiscal 2013. For fiscal 2014, estimate revision trend portrays a mixed sentiment as 2 analysts raised their estimates while 1 analyst lowered its estimate over the last 7days.

Magnitude of Estimate Revisions

As a result of the bearish sentiment of most of the analysts over the past week, the Zacks Consensus Estimate for first-quarter 2013 moved down by 10 cents to 39 cents per share. For second-quarter 2013, earnings per share as projected by the Zacks Consensus are down by 5 cents to 58 cents.

Similarly, the Zacks Consensus Estimate for fiscal 2013 and fiscal 2014 earnings per share are down by 24 cents and 3 cents, to $2.00 and $2.30, respectively.

Constellation Brands is expecting a lower year-over-year EPS in fiscal 2013 compared with fiscal 2012. The company expects its fiscal 2013 adjusted EPS in the band of $1.93 to $2.03 per share compared with $2.34 in fiscal 2012. The lower guidance range provided by Constellation Brands is in anticipation of a higher tax rate of 34% in fiscal 2013 compared with 17% in fiscal 2012 along with increased expenses due to investments in brand building.

Moreover, the company also expects higher cost of goods sold, which may lead to lower operating income growth compared to sales growth. We believe the analysts covering the stock adjusted their estimates according to the company’s guidance range.

Our Recommendation

We believe that the company’s strategic initiative of expanding its foothold in the U.S wine industry along with focus on brand building and promotion will accelerate its growth opportunities while strengthening its market position. Moreover, in an effort to generate strong margins, Constellation Brands is also focusing on higher priced segments across all key categories.

Moreover, the company’s recent stake sale in the Australian and U.K. businesses will help it 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 Brands’ business strategy.

However, 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. We believe 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 (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.

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

 
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