Modelo maker Constellation's upbeat forecast should send the stock to new highs

Constellation Brands reported better-than-expected quarterly earnings Thursday, driven by strength in its beer business that more than offset continued weakness in wines and spirits. Management's upbeat forecast for fiscal year 2025 should send the stock to new all-time highs. Comparable net sales for the three months ended Feb. 29 increased 7% year over year to $2.139 billion, beating Wall Street's expectations of $2.095 billion, according to LSEG. Adjusted earnings-per-share (EPS) increased 14% compared with the same period last year, to $2.26, a beat versus the $2.08 per share predicted by analysts. Excluding equity losses from Constellation's stake in cannabis company Canopy Growth , adjusted EPS was $2.30. Constellation Brands Why we own it : We like Constellation Brands for its beer franchise, which includes popular Mexican brands Modelo, Corona and Pacifico. We would like Constellation to concentrate on beer and divest its wine and spirits business. Competitors : Anheuser-Busch Inbev and Molson Coors Weight in Club portfolio : 2.91% Most recent buy : Oct. 25, 2023 Initiated: May 5, 2022 Bottom line We remain impressed by the strength in Constellation's beer business, which has shown zero noticeable slowdowns despite worries about a slowdown in consumer spending and the increased use of GLP-1 weight loss drugs. More importantly, the sales gains in the beer business are almost entirely driven by volume gains, not higher prices. Over the past couple of years, many consumer packaged goods companies relied on higher prices to grow their sales and earnings. With consumers finally pushing back on higher prices, a big question those companies face is whether they can regain the volumes to offset the price reductions. Constellation does not have this issue. This is a volume-driven story that makes its growth more durable in this increasingly complex consumer environment. On top of it all, the company raised the quarterly dividend by 13% to $1.01 per share. After years of losing its way by spending too much money on failed acquisitions and investments, Constellation is back to prioritizing a shareholder-friendly capital allocation. This is another aspect of the story that is underappreciated. Dividend increases in line with earnings growth are a hallmark of high-quality consumer goods companies. We reiterate our 1 rating on shares of STZ and are raising our price target to $300 from $270. For more on the story, tune in to “Mad Money” at 6 p.m. ET to catch Jim Cramer's conversation with CEO Bill Newlands. STZ YTD mountain Constellation Brands YTD Quarterly results Beer sales climbed nearly 11% year over year to $1.70 billion, beating the Street's consensus estimate while operating income increased 12% to $585 million. Beer depletions, a key metric that represents how much was sold to retailers by a distributor, grew 8.9% and was better than expected, too. Constellation's portfolio of beers delivered strong depletion performance, with Modelo Especial up 14%, Corona Extra up 1%, Pacific up 22%, and Modelo Chelada up 14%. Management cited Circana channel data as evidence that its beer business outperformed the total U.S. beer category and remained the top dollar sales share gainer. More share gains are likely ahead as the beer business benefits from the spring shelf space reset . This is when major retail stores reallocate their shelf space and give more room to the top-performing brands. On its post-earnings call with investors, management said it gained a low double-digit percent incremental shelf space this spring and added another 21,000 resets through its shopper first shelf program in fiscal 2024. These additions should support strong growth in the months ahead. We were also pleased to hear beer had a strong cadence. Management described March as “very comfortably strong” putting the company in position for a great year. Summer is the strongest season for beer sales. Outside of retail shelf space, Constellation has an opportunity to further increase its share by increasing its small presence in on-premise channels like bars and restaurants. New draft handles for Modelo Especial and Pacifico should drive growth later this fiscal year. Beer operating margins increased 30 basis points to 34.4%, a tad lighter than Street expectations. Margins improved thanks to cost savings initiatives, pricing, reduced marketing, and lower SG & A (Selling, general and administrative) expenses as a percent of sales, but was offset by a VAT receivable write-off, higher input costs like packaging and raw materials, and currency. The wine-and-spirits division continued its well-known struggles. Net sales fell 6% to $436 million, slightly missing the Street's estimates, while operating income dropped 13% to $111 million. Operating margins fell 220 basis points to 25.5%, worse than expectations, as benefits from favorable transportation and warehousing costs, pricing, and reduced SG & A were more than offset by an unfavorable channel mix. Management said the challenges facing this business will not go away anytime soon, especially in the mainstream and premium price segments. However, the company is taking steps to improve the unit's performance this fiscal year. Constellation plans to refocus on its premium and above brands like Crawford, Meiomi, The Prisoner, and High West, accelerating “additional tactical investments” to support Woodbridge, its largest mainstream brand, and providing ongoing support of other significant brands like Robert Mondavi, Ruffino, and Lumina. From what it sounds like, management is narrowing its efforts to the better-performing brands with the potential to grow over the long term. We would still prefer to see Constellation get rid of this business altogether and double down on its strength in beer, but we appreciate management's efforts to fix it up. Guidance Constellation provided upbeat guidance for fiscal 2025 that exceeded expectations. It forecasted enterprise net sales growth of 6% to 7%, with beer up 7% to 9% and wine and spirits between down 0.5% to up 0.5%. The beer outlook is in line with the company's traditional growth rate, but wine and spirits look much better than feared and some may view that as too optimistic. Enterprise operating income is expected to increase 8% to 12% on a comparable basis, with beer up 10% to 12% and wine and spirits disappointingly down 9% to 11%, Comparable earnings per share are expected to grow in the low double digits to $13.50 to $13.80. This estimate assumes no equity earnings impact from its investment in Canopy and was better than analyst forecasts of $13.43. As for some other items, operating cash flow is expected to be $2.8 billion to $3 billion and the company expects to spend $1.4 billion to $1.5 billion on capital expenditures to support capacity additions to its beer brewing operations, leaving $1.4 billion to $1.5 billion of free cash flow. Consistent with its messaging at its Investor Day last year, Constellation expects a step up in free cash flow in the coming years. Between fiscal 2026 and fiscal 2028, management expects to cumulatively generate between $7 billion and $9 billion. This should lead to bigger dividend increases and share repurchase programs. (Jim Cramer's Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Bottles of Corona, Modelo and Pacifico beer are displayed on the a shelf at a supermarket on April 6, 2017 in San Rafael, California.Justin Sullivan | Getty Images

Constellation Brands reported better-than-expected quarterly earnings Thursday, driven by strength in its beer business that more than offset continued weakness in wines and spirits. Management's upbeat forecast for fiscal year 2025 should send the stock to new all-time highs.