Constellation Brands (STZ) on Thursday delivered a top-and-bottom-line quarterly earnings beat, while raising its full-year guidance. And with shares retreating unnecessarily post-results, we’re upgrading the stock to a buy rating. Net sales for the three months ended Aug. 31 climbed 7% year-over-year, to $2.84 billion, ahead of Wall Street’s expectations of $2.82 billion, according to Refinitiv. Adjusted earnings-per-share (EPS) advanced 17% compared with the same period a year prior, to $3.70, above the $3.36 a share predicted by analysts, Refinitiv estimates showed. Excluding equity losses from Constellation’s stake in cannabis company Canopy Growth , adjusted EPS came in at $3.80. In addition to the headline numbers, adjusted operating income of $968 million was up 9.6% year-over-year and above the $912 million consensus estimate, according to FactSet. Operating cash flow came in at $957 million, missing analysts’ forecasts for $2.07 billion, while free cash flow of $652 million edged out the $501 million estimate, FactSet data showed. Constellation stock tumbled more than 3% in midday trading Thursday, to roughly $240.70 a share. Bottom line Constellation Brands — maker of Modelo and Corona beer — delivered strong results for the second quarter of its fiscal year 2024, along with a guidance raise ahead of Wall Street’s expectations. Nonetheless, the stock is down on the release, likely because management did not pass through the entirety of today’s beat into its revised full-year forecast. A similar dynamic played out last quarter, which ultimately proved to be a buying opportunity. In addition to the top-and-bottom-line beat, operating income came in ahead of expectations, with the company’s overall operating margin expanding about 90 basis points on last year. Though Constellation’s wine-and-spirits segment is still under pressure as management works to shift the mix of the portfolio toward higher-end brands, the company expects performance to pick up throughout the rest of the year. Beer segment performance, meanwhile, was very strong, with depletions accelerating by a rate faster than Wall Street was modeling. As with Constellation’s last quarterly report, we think management is being conservative by not passing the entirety of the second-quarter earnings beat through to their full-year guidance forecast. As a result, we’re upgrading the stock back to a 1 rating , meaning we would be buyers here ahead of the company’s upcoming Investor Day on Nov. 2. Quarterly results Beer sales climbed 12% year-over-year, to $2.4 billion. There were a wide range of estimates this quarter, but overall the result appears to be slightly ahead of analysts’ forecasts. Operating income of $954 million also managed to edge out expectations despite a 60-basis-point contraction in the segment’s operating margin. Margin performance took a hit as a result of raw-material cost inflation, voluntary product recall and costs related to capacity expansion. Those factors more than offset tailwinds of sales growth, positive pricing dynamics and efficiency gains. Beer shipments to distributors were up 8.7% annually. Depletions were up 7.9%, ahead of expectations in the low-7% range and representing a nice acceleration from the 5.5% level reported in the company’s last quarter. Constellation was the top share gainer in market dollars in the U.S. beer market for the ninth quarter in a row, and now owns six of the top 15 growing brands on the market. Modelo Especial remains the top brand share gainer and leading brand “in the entire U.S. beer category in dollar sales.” “Not only did we remain the top share gainer over the entire critical summer season, we also extended our leading position from Cinco de Mayo to become the No. 1 share gainer in track channels during the 4th of July holiday. And although it falls slightly after our second quarter end, I’m also pleased to report that we further accelerated our share gains during Labor Day,” CEO Bill Newlands said on the post-earnings conference call. Meanwhile, sales at the wine-and-spirits division came in at $444 million, a decrease of 11% organically year-over-year. Though analysts’ estimates were a bit more varied than usual, the results appear to be a miss versus expectations. Operating income of $81 million was also short versus the $101 million expected by Wall Street. The segment’s operating margin contracted to 18.2%. A reduction in freight-and- material costs, along with improved marketing expense management, was more than offset by a decline in shipments, which were down 15.3% organically on an annual basis. Depletions declined 7.8% year-over-year. Management attributed much of the weakness for wines and spirits to reduced demand for mainstream brands. This dynamic, though painful at the moment, supports management’s ongoing effort to refocus the portfolio on higher-end brands. The company expects “net sales growth and operating income growth of that business to ramp up through the remainder” of fiscal year 2024. Guidance Management raised its full-year comparable EPS forecast, and is now targeting a range of $12 to $12.20 per share, up from a prior range of $11.70 to $12.00 per share and ahead of the $11.72 predicted by Wall Street. The forecast excludes Canopy Growth. Assumed in this guidance is net sales growth for beer of 8% to 9% (a modest increase from the 7% to 9% range previously provided) and roughly flat organic net sales (-0.5% to +0.5%) for wine and spirits, unchanged from the prior forecast. Operating income guidance was left unchanged, with growth of 5% to 7% expected for beer and growth of 2% to 4% expected for wine and spirits. Additionally, operating cash flow is still expected to come in between $2.4 billion and $2.6 billion. Taking out capital expenditures of $1.2 billion to $1.3 billion (unchanged), the free-cash-flow forecast comes in between $1.2 billion and $1.3 billion (unchanged). Looking further out, the company sees “significant opportunities to maintain the growth momentum” of its beer business, Newlands said. That’s “particularly due to the resilience of key secular trends in the consumer landscape like ongoing consumer-led premiumization across beverage alcohol and the continued outsized growth of the Hispanic population in the U.S.,” he explained. (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. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Constellation Brands (STZ) on Thursday delivered a top-and-bottom-line quarterly earnings beat, while raising its full-year guidance. And with shares retreating unnecessarily post-results, we’re upgrading the stock to a buy rating.
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