Constellation's Q4 Results Offset By Weak Guidance
Constellation Brands (NYSE:STZ) shares are down 5.0% in early action after posting a better-than-expected quarter. The catch is that results are better than the broad consensus of analysts, a consensus that has trailed reality as it has with so many other stocks in the market today. While the broad community of analysts has failed to revise targets this is not the case for all. Analysts like Bank of America (NYSE: NYSE:BAC) called the stock out as recently as the day before earnings as an estimate-beater. Their team was expecting beer growth in the high-single-digits which Constellation beat that easily, and for wine and spirit growth in the range of 3.4% and nailed that target soundly. Bank of American was also expecting a positive upgrade to guidance and some mention of share buybacks but was disappointed on both fronts.
Constellation Brands Optimization Plan Pays Off
Constellation Brands' story has more in common with the broad market than just the analyst's sentiment. The company began a repositioning and portfolio optimization strategy well before the pandemic struck and those efforts were rewarded in the post-pandemic period. The focus of the strategy is portfolio optimization toward the higher-end beer, wine, and spirits that command the most attention from consumers. In that light, the small 3.0% YOY increase in revenue is even more important to note because it includes the negative impact of divestitures and beats the consensus by 420 basis points. Revenue growth was driven by a 15% increase in beer sales, 16% organically, and a 3.3% increase in the ongoing wine and spirits business.
Moving down the report, the company's margins contracted a bit due to COVID-related costs but are expected to bounce back over the next year. At the operating level, income fell 6% despite the revenue strength but came in ahead of consensus and helped the company achieve record operating income and free cash flow for the fiscal year. On the bottom line, the $1.95 in GAAP earnings and $1.82 in adjusted earnings both beat the consensus by wide $0.31 and $0.27 margins. As for the cash, the company has been paying down debt to the tune of $1.7 billion in F2021 and paying dividends to shareholders.
The guidance for F2022 is good but not as good as what the analysts were expecting. The $9.95 to $10.25 in adjusted earnings is flat to slightly higher on a YOY basis and short of the $10.40 currently expected by the analysts but may not be fully factoring in the economic reopening expected for this summer.
Constellation Brands Dividend Is Growing
Constellation Brands pays a safe and growing dividend albeit at a very slow pace. The company is targeting (and has) a 30% payout ratio which is something we like but earnings growth is expected to be tepid so we don't expect robust increases in the year to come. Other than that, the 1.3% yield is reliable and backed up by a sound and strengthening balance sheet.
Looking at the charts, patient investors should be able to scoop this blue-chip consumer staple at a better yield and price point. Shares are down 5.0% and show little signs of support at this level. With revenue and earnings growth expected to be tepid this year we see a scenario in which this stock moves down to the bottom of its range near $208. If this level emerges as a strong support zone we might become interested, until then this stock is in a wait, watch and see what happens kind of market.
