In the Spotlight - Some Perspective on Constellation Brands
Constellation Brands' shares surge on fourth quarter profits recovery
Investors have got themselves all giddy over Constellation Brands' better-than-expected profits performance, leaving analysts to try and water down the optimism for the year ahead.
Constellation's share price rose by 7% on the New York Stock Exchange yesterday, to around US$21.8, after the group reported a strong swing to the black in its fourth quarter. Excluding one-off items, profits for the year to the end of February increased by 9% on the previous year. Sales in the core North America business rose by 5% over the 12 months, partly thanks to a strong finish.
After so many months in hibernation, seeking only to shed struggling businesses and debt, Constellation's apparent emergence into the spring sunshine inevitably generated excitement. "The consumer is definitely back," hailed Constellation's CEO Rob Sands during a conference call with analysts, adding to the furore.
But, the analysts didn't go wild.
As is the way with those accustomed to struggle, the merest flicker of hope can sometimes spark exaggerated expectations. Perhaps a few investors experienced this yesterday, without wishing to take anything away from the hard yards that Constellation has put into restructuring its business in the last couple of years.
Among the analyst fraternity, there is definitely a sense that while Constellation has improved its position, the US wine market is far from a tamed beast.
"Given the firm's lack of a competitive advantage amid severe competition in its core markets, we think Constellation Brands is fairly valued," said Morningstar analyst Philip Gorham.
Stifel Nicolaus maintained its 'neutral' rating on the Robert Mondavi winemaker. "Growth remains elusive in the company’s wholly-owned wine & spirits business," it said, adding that this balances out benefits from good progress on cutting debt. Zacks Equity Research also maintained a long-term neutral rating on the group.
Given that Constellation has sold off its Australia and Europe wine business, its performance in the US wine market is now key to the group's fortunes.
"In fiscal 2012, we estimate flat wine shipments due to end-demand and tougher shipment comparisons than depletion comparisons," said Stifel Nicolaus, which warned that Constellation may have to increase promotions to build market share.
More positively, Gorham said that Constellation's North America business in general, which also includes Svedka vodka and Crown Imports, should produce "sustainable revenue growth in the low to mid-single digits", while margins should continue to expand.
Despite proclaiming the return of the American consumer and good momentum in wine, Constellation's Sands himself offered some cautious words on the year ahead. "The consumer is extremely price senstive and is looking for a deal, and therefore promotional activity remains robust," he told analysts, adding that the US on-premise is flat as flat can be.
For some perspective on yesterday's share price spike, Constellation's shares are still down 1.6% year-to-date. On the right track, then, but not yet out of the woods.
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