Analysis - Constellation Brands' "unpleasant surprise"
Constellation released its full-year results yesterday
Constellation Brands yesterday surprised the market when it announced it had underestimated the level of investment needed in its Mexican brewery.
Instead of US$500m-600m, the upgrading project is now predicted to cost as much as $1.1bn. Constellation says the money is needed to double capacity to 20m hectolitres and is crucial to making the most of its recent surges in beer sales that have outpaced rival breweries operating in the US. CEO Rob Sands also says the company is paying a premium to get production up and running fast and move quickly past what his CFO colourfully called “the stage (where) the snake is eating a camel”.
The news, however, caused analysts a few digestive problems of their own. It was “an unpleasant surprise”, Caroline Levy wrote in a note today (10 April) and warned that the Constellation “story is certainly diminished by the higher needs of (the) Piedras Negras (brewery)”.
Much easier to swallow was Constellation's current beer performance, which Levy says is growing at “craft-like rates with much larger scale”. This was after the company's full-year results, released yesterday, which showed impressive increases for sales and profits because of Constellation's takeover of the Crown Imports JV it ran with Grupo Modelo and the market-leading sales increases.
Levy also said Crown Imports' US-only footprint is a further plus because of emerging-market volatility.
Meanwhile, Stifel's Mark Swartzberg raised earnings estimates on Constellation because of its beer unit, while suggesting that the company will likely further increase the capacity of the brewery. According to Swartzberg, his “best guess” is that 20m hectolitres will become 25m because of the increased investment.
Almost one year on from its full takeover of Crown Imports, when previously it was a JV partner, Constellation's beer story keeps getting bigger and bigger.
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