US: Constellation hits back at M&A critics

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Constellation Brands has hit back at claims the company is making acquisitions to cover up organic weakness in the business.

After reporting a rise in net income yesterday of 2%, CEO of Constellation Richard Sands told analysts: "We do not need to make acquisitions to further strengthen our business, no less cover these - quote - 'weaknesses'," he said

US revenues outperformed market expectations, particularly branded wine and imported beer, but these results were offset to a degree by disappointing international results, particularly in the UK. Reflecting challenging conditions in the UK, Europe branded wine sales were flat, including a negative 2% currency impact.

In a research note today, however, Mark Swartzberg of Legg Mason said: "We were surprised by the level of international weakness, especially in the UK, and expect challenging trends for the next several quarters. However, we also believe increasing US momentum is likely to sustain or increase. This plus new margin initiatives underlie our belief that a weak revenue quarter does not signal a sustained slowdown in revenue and profit growth."

He added: "We expect the UK, approximately 22% of EBIT, to remain a laggard in company revenue and profit growth due largely to stepped-up promotional activity fuelled by excess wine from Australia.

"However, we also believe the company is responding aggressively to the market's challenges and that it is using its market leadership and diverse portfolio, including California wines, to strengthen its competitive standing while others are focused squarely on defence."

"The US, nearly three times as large as the company's UK business, presents a contrasting picture which we expect to sustain. In beer, shipment comparisons become much easier in 2H, and the company heads into the period with considerable momentum behind the Modelo brands. In spirits, we expect solid growth to continue and that the company's efforts in the premium and super premium segments are likely to yield significant fruits over the next few years. In wine, firming industry pricing, an expanding portfolio due to Mondavi, and other factors point to continued high single-digit growth from the company's US wine business."

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