Constellation Brands Stock Swings After Earnings Announcement

Key Points

• Constellation Brands has held its ground during the past year, outperforming competitors despite a challenging inflationary period in the industry. 
• Quarterly earnings results remind investors of these brands' relentless stability, offering further upside for the full-year outlook. 
• Underlying recoveries in the industry's supply chain may aid the company in improved recovery times and magnitudes. These technicals and fundamentals further amplify the possibility of a near rally.

The beverages sector is one of those economic niches that are considered 'defensive'; this characterization is typically a Wall Street favorite when the crowd faces a questioning economy, and a stream of stable and reliable cash flows becomes all the more attractive. Constellation Brands NYSE: STZ falls into such a category, as the stock has held up relatively steady at 6% annual performance, despite a most volatile year in the broader markets amid FED pivots and recession fears hovering over the minds of business owners and consumers. Investors can rest assured of further stability when comparing relative performance and valuations within the industry.

Other operators in the beverages industry of a similar size in market capitalization when compared to Constellation, such as Brown Forman Corporation NYSE: BF.B have something interesting to say in regards to market favorites. Despite trading at a lower valuation multiple, measured as the price-to-earnings ratio, Constellation Brands has attracted a seemingly larger base of investors.

By trading on a forward (next twelve months) P/E ratio of 18.7x, relative to Brown Forman's 29.4x, investors would expect to see a similar gap in stock performance over the year. To their surprise, Constellation has outperformed Brown Forman by as much as 11.4% during the past twelve months, making it the preferred name by market vote and the cheaper alternative to sector exposure.

Results Behind Stability 

During the first quarter of fiscal year 2024, Constellation Brands posted reasonably attractive growth in their product mix. Every industry has its own set of widely watched KPIs (Key Performance Indicators); the retail and wholesale industry puts out a metric known as comparable sales, which measures the growth or decline of sales across locations that have been operating for 12 months or more.

The goal of this metric is to offset any 'inorganic' growth brought on by the opening of new locations. Constellation has grown in this manner and kept up with inflation with a 6% advance during the year.

What is even better for investors, and perhaps one of the drivers behind price stability, is a 9% growth in the earnings per share. Ending the quarter at a comparable EPS of $ 2.91 would be a severe disconnect from the GAAP reported EPS of $0.74, a discrepancy born from adjusting for the comparable factor, eliminating the dilutive effect of 'inorganic' expansion growth.

However, today's results are less important than those that management expects to deliver for the full-year outlook, pointing to comparable earnings per share of $11.70 to $12.0. These outlooks may be reflective of a more significant underlying tailwind that is forming within the consumer sector.

Following the ISM manufacturing PMI index, investors can spot a bottoming of the food and beverage sector beginning to form. This dynamic can benefit companies like Constellation to ride on a turnaround and break out of the sector.

During the past six months, the previous challenges stemming from disruptions within supply chains driving inflationary environments have eased. Supplier deliveries have been reported to be faster during the past three months out of the past six. This trend directly affects operators' pricing dynamics and product mix, enabling expansions to return to gross and net margins.

Relative Direction

Considering that Constellation stock hit its all-time high price of $261.52 during the first half of 2022, a critical support level could have been speculated around the $209.25 mark. This support is born from the Wall Street definition of a 'Bear Market' as a 20% retracement from all-time - or recent - high prices. In the case of Constellation stock, the $209 mark was hit and immediately rejected with a follow-up rally to today's prices. This is quite important to note, as the market is casting a vote of confidence, prohibiting the company's valuation from entering bearish territory. 

Apart from this technical occurrence, alongside an attractive forward P/E valuation relative to the sector, Constellation management has also sent a subtle message about the possibility of further upside. By repurchasing up to 6 million shares during the past year, insiders tell common shareholders that the stock's intrinsic value may be higher than today's prices.

Additionally, Constellation analyst ratings are pointing toward a top-side price target of $300 per share, which may be more aligned with the potential closing of valuation gaps between Constellation and its competitors.