We came across a bullish thesis on Constellation Brands, Inc. (NYSE:STZ) on ValueInvestorsClub by eigenvalue. In this article, we will summarize the bulls’ thesis on STZ. The company’s shares were trading at $182.00 when this thesis was published, vs. the closing price of $175.50 on Feb 28.
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STZ produces, imports, markets, and sells beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company provides beer primarily under the Corona and Mondelo brands.
The beer industry has witnessed a decrease in volume recently but a demand for premium products has ensured that the revenue has not dropped. The volume of STZ has been growing 3-5% in the last few years, taking a share of the pie from large players like Inbev and Molson Coors. A growing Hispanic base with a younger population in the US should ensure that the revenue growth remains stable even when the industry is under pressure.
The financial performance for FY2025 has been robust in the beer segment with net sales up by 6% and operating income rising by 10%. The EBIT margin has also improved by 170 basis points to 40.5%. In contrast, the wine & spirits business witnessed a slump in revenue to the tune of 11% which led to a decline in operating income by 22%. Historically, the capital allocation has been poor with unfruitful acquisitions like Canopy and Ballast Point. STZ is now focusing more on repurchases and the primary business capex is focused on building capacity in Mexico. Till 2025, the free cash flows should be fully invested but after that, the company is expected to generate surplus cash flows of around $100-150 million. Debt levels remain conservative and stand at <3x EBIT and 2.75x EBITDA.
At a price of $180, the P/E multiple stands at 10x based on the 2027 estimated EPS. This is an extremely attractive valuation for a quality business that is growing in volume while the beer industry is under pressure. Molson Coors and Inbev are trading at 8.2x and 10.3x their 2027 EPS projections. Given the superior growth rate of STZ, it should command a premium valuation compared to its peers.
While we acknowledge the potential of STZ as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than STZ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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