Constellation Brands Inc. is one of the leading producers in the world of alcoholic beverages with brands covering beer, wine & spirit product segments. It holds the third largest beer operations in North America and these operations are mostly composed of their Mexican beer portfolio alongside craft beers. Constellation Brands use the wine & spirit segment to sell premium alcohol products in a diverse range of niche markets.
Their recent earnings reports show that Constellation Brands is on schedule to continue performing satisfactorily. The company just reported an EPS of $3.77 and a comparable basis EPS of $2.20 which narrowly missed Q1 expectations. Although Constellation brands did miss expectations for comparable basis EPS by $0.23, the company did outperform revenue expectations by $10M in the first quarter of the 2019 fiscal year.1 The company reports that higher freight costs, the rising American dollar and an increase in marketing expenses reduced its operating margins in its beer business in spite of the fact that its unit sales rose 11% year-on-year to 1.38 billion, operating income also rose 4.5%. Constellation Brands did not fare as well in its wine and spirits business lines, net sales decreased 2.5%, operating income decreased 16.8% and its segment operating margins decreased 430 basis points to 25% ascribed to a rise in grape prices and an increase in transportation costs.1
In Q1 of the 2018 fiscal year Constellation Brands held a profit margin of 20.7%, compared to last year's figures, the firm has shown an increase in profit margin of 12.7% to 33.4%. In comparison, two of Constellation Brands main competitors, Anheuser Busch Inbev and Molson Coors Brewing Company, obtained profit margins of 16.26% and 10.84% respectively. The return on equity also showed a marked improvement quarter to quarter, the previous quarter resulted in a 4.99% ROE, while the first quarter of the 2019 fiscal year returned an ROE of 7.04%. Its competitors Anheuser Busch Inbev and Molson Coors Brewing Company produced ROE results of 11.39% and 9.02% respectively. The firm's P/E ratio paints a different picture. Constellation Brands most recently reported a P/E ratio of 16.04, while its competitors Anheuser Busch Inbev and Molson Coors Brewing Company reported P/E ratios of 11.39 and 9.02.
The current ratio of Constellation Brands for the first quarter of the 2019 fiscal year is 1.81, which is above the minimum of 1. This shows that the firm is currently able to meet its current financial obligations using its cash, inventory and any other liquid current assets. Higher ratios show that the firm is able to fulfill its obligations. In stark contrast, Anheuser Busch Inbev and Molson Coors Brewing Company reported current ratios of .67 and .66 respectively for the most recent quarter. Constellation Brand's total debt ratio is currently .54; this indicates that more than 50% of the firm's assets are financed with debt. The firm has improved its cash ratio the from quarter to quarter, its cash ratio for the fourth quarter of the 2018 fiscal year was .007, while the first quarter of the 2019 fiscal year showed improvement to .018. Thus, short term lending if needed would be easily attainable.
Most recently, Constellation Brands has begun pursuit of diversifying into the recreational marijuana market. Constellation Brands has invested 4 billion in Canadian cannabis producer, Canopy Growth, lifting its stake from 9.9 percent to 38 percent. Analyst predict that if more developed countries legalize marijuana, Canopy Growth is poised to capture double-digit market share of the global market and the stock could return many times its current valuation. For this to happen there are many unknowns that needs materializing. Trump has not shown any inclination to legalize cannabis on the federal level and Justin Trudeau would need to be re-elected, as he has shown interest in legalizing marijuana in Canada. In midst of these uncertainties, investors are hopeful that Constellation Brands will be able to develop new cannabis-based products such as sleep aids and cannabis-infused beverages.
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