Analysis - Constellation Brands and the glass ceiling
Constellation has denied reports it has run out of bottles for Corona
The glass most definitely looks half full for Constellation Brands at the moment.
The company, which bought out its beer JV partner in the US last year, yesterday (2 July) posted soaring Q1 sales and profits driven by strong growth in the expanded beer unit. But, while analysts are positive over the liquid flowing out of Constellation's brewery taps, there has been some concern recently over the glass itself.
In a client note today, CLSA flagged a news article that suggested Constellation had run out of glass bottles for its Corona brand. The company denies this and says the reason some Florida retailers suffered tightness in some Corona SKUs was down to high demand.
However, the incident has highlighted Constellation's dependence on sourcing glassware for its Piedras Negras brewery in Mexico through an agreement with Anheuser-Busch InBev. Constellation would like to procure its raw materials independently and is working to make this happen. The company expects this to lower margins, which analysts in turn hope will increase earnings per share.
But, CLSA has doubts about this, mainly because of what it claimed was an “ambivalent” stance on the issue from Constellation CFO Bob Ryder in the conference call following the release of yesterday's Q1 results. Ryder said the outcome of moving to its own purchasing contracts “(could be) positive, negative or neutral”.
In turn, CLSA said: “While we believe there is potential for the company’s glass costs to decline, they may not do so materially.”
It's an important conclusion, because Constellation is investing heavily in becoming self-sufficient from A-B InBev, which currently also brews 40% of Constellation's beer. The company is estimating it will spend as much as $1.1bn on upgrading its Mexican brewery to accommodate all of its brewing needs, be it beer or glass. That's a lot of money to spend if you are unsure whether or not you are to benefit from it.
Construction on the brewery is expected to complete in mid-2016. Analysts may have to wait until then to see how full the glass really is.
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