A Turning Point For Constellation Brands Constellation Brands has been working hard over the past few years to optimize its portfolio and position itself for market-leading growth. Those efforts are largely paying off if hampered by...

Mixed Results But Positive Outlook For Constellation Brands

Constellation Brands (NYSE: STZ) has been working hard over the past few years to optimize its portfolio and position itself for market-leading growth. Those efforts are largely paying off if hampered by industry-wide headwinds. The company's Q2 results are proof the growth strategy is working despite those headwinds and suggest to us the recent sell-off in prices is overdone. Trading near $210 the stock is down nearly 15% from the recent highs and opening up what looks like an opportune buying environment. With growth, share repurchases, and a very safe dividend to look forward too investors would be wise to consider a position in this stock.

Constellation Brands star Is Still Rising

Constellation Brands' growth strategy is centered on trends within the industry. The company is focusing on the highest growth categories in the market which include higher-end beer wine and spirits. The success of the strategy is seen in both the top and bottom lines despite some mixed results relative to the analyst consensus estimates. As for revenue, the Q2 revenue of $2.37 billion is up 16.7% sequentially, 4.9% over last year, 12.8% versus 2019, and beat the consensus by 300 basis points. Within that, beer sales were flat as growth in the high-end section was offset by declines in the lower-end market while wine and spirits advanced 15% to more than double the industry average.

The only bad news is that margins came under pressure and missed the consensus target by 130 basis points. This left adjusted earnings at $2.38 per share or $0.41 weaker than expected and down from last year. The silver lining is that the company expects earnings to rebound strongly in the third and fourth quarter of the fiscal year and have raised their guidance to reflect that. The company is now expecting an adjusted EPS in the range of $10.15 to $10.45 versus the Market beat.com consensus of $10.14. This is very significant in light of recent trends, no few S&P 500 companies have issued weaker-than-expected guidance since the beginning of the reporting season.

It Pays To Own Constellation Brands

Regardless of the growth outlook, Constellation Brands' cash flow and free cash flow are ample and being used to buy back shares and pay dividends. The company is planning to return $5 billion in buybacks and dividends while maintaining its investment-grade rating which is something we like to hear. While no mention was made in the second quarter report of repurchases made during the quarter the company had previously announced $500 million of incremental buybacks for the quarter and we see no reason why that didn't happen. In addition, Constellation Brands is paying about 1.45% in yield and is on track for a dividend increase by the end of the fiscal year. The plan is to maintain a 30% payout ratio and the current payout falls below that threshold at the low end of the guidance range.

The Technical Outlook: Constellation Brands Is Ripe For Reversal

Shares of Constellation Brands have been moving lower since May but appear to be at the bottom. Support appears to be strong at or above the $208 level and we see a reversal in progress. While price action is wrestling with resistance in the near term we see the stock moving above the short-term moving average and entering a trading range if not begin to edge higher. Price action may be muted over the next couple of months but we see this stock moving higher and ultimately setting a new all-time high in tandem with revenue and earnings growth.