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Important disclosures appear on the last page of this
report.
The Henry Fund
Henry B. Tippie College of Business Jack Simpson
[[email protected]] Constellation Brands, Inc.
(STZ) November 4, 2020 Consumer Staples – Beverages – Wineries
& Distilleries Stock Rating BUY
Investment Thesis Target Price $230 -$260 The HF is bullish on
Constellation Brands and currently recommend a BUY. STZ is a leader
in the higher-end alcohol market and continues to have superior
margins compared to peers. The company has been able to increase
its market share in the U.S. beer industry by over 5% in the past
decade and continues to see strong growth in total sales. For these
reasons, we recommend a BUY with around a 30% upside. Drivers of
Thesis • STZ continues to focus on higher margin, higher quality
products which will
continue to allow the company to expand margins and increase
profitability. We have projected margins to increase to only 52.5%
in 2025E. We believe the company could easily grow margins more
• We have only projected a 5-year total revenue CAGR of 2.2%.
The past 5-year CAGR for STZ was 5%. We believe our revenue
forecasts are still conservative and STZ could see much higher
growth
• High growth potential in multiple different markets including
the Canopy Growth investment, the hard seltzers industry, and
increased e-commerce and direct-to-consumer sales which will
increase STZ’s end markets
Risks to Thesis • STZ has seen increased negative sales growth
in the Wine & Spirit segment
which saw revenue decrease by 6.4% in 2020. We have not
projected growth to be that negative in our forecast period
• STZ operates in an extremely competitive industry. Consumer
preferences are constantly adapting and STZ must stay on top of new
products. We worry about the company’s focus majority on
higher-margin beverages
Henry Fund DCF $253 Henry Fund DDM $214 Relative Multiple $248
Price Data Current Price $185.78 52wk Range $104 – 208 Consensus
1yr Target $218 Key Statistics Market Cap (B) $38.2 Shares
Outstanding (M) 192.8 Institutional Ownership 84.8% Beta 1.08
Dividend Yield 1.49% Est. 5yr Growth 6.6% Price/Earnings (FY1) 21.6
Price/Earnings (FY2) 20.1 Price/Sales (TTM) 3.9 Price/Book (mrq)
2.7 Profitability Operating Margin 33.2% Profit Margin (5yr avg.)
22% ROA (5yr avg.) 8.2% ROE (5yr avg.) 20.9%
Earnings Estimates Year 2018 2019 2020 2021E 2022E 2023E EPS
HF est. $8.72
$9.28
$9.12
$9.42 $9.80
$10.11 $10.2
$11.23 $10.5
growth 7.52% 3.72% 3.70% 12 Month Performance Company
Description
Constellation Brands (STZ) is a mature company that engages in
the production and distribution of alcoholic beverages globally.
The company was founded in 1945 and is currently headquarter in
Victor, New York. The company has operations in the U.S., Mexico,
New Zeeland, Italy, and Canada which has allowed the company to
establish numerous different beers, wine, and spirit products.
Brands include Corona, Modelo, Svedka, and more.
3.9
14.3
1.7
14.5
0
5
10
15
20
P/S EV/EBITDA
STZ XLY
-60%
-40%
-20%
0%
20%
40%
N D J F M A M J J A S O
STZ S&P 500
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COMPANY DESCRIPTION
Constellation Brands is an international producer and marketer
of beer, wine, and spirits. The company has operations globally in
the U.S., Mexico, New Zealand, Italy, and Canada. Some of
Constellation Brands most well-known, high-quality brands include
Corona, Modelo Especial, Robert Mondavi, Kim Crawford, and SVEDKA
Vodka.
The company breaks down revenue into three major product types
which include Beer, Wine, and Spirits. As shown below, Beer
products represent STZ’s largest revenue stream for 2020 with 67.3%
of total company sales. Wine is the company’s second largest with
28.4% of sales and finally Spirits with only 4.3% of total
sales.
Source: Company 10-K
Although the company has three separate product types, STZ only
breaks down revenue into two separate segments on the income
statement which include Beer and Wine & Spirits.
Beer Segment
Constellation Brands is the top brewer and seller of imported
beer in the United States beer market. The company focuses on the
high-end segment of the U.S. beer market. This includes the
imported, craft, and domestic premium beer. The company also
includes alternative alcohol beverage categories in this segment
like hard seltzers. Overall, the company sells numerous brands
in
the high-end market which is driven largely by the company’s
Mexican beer portfolio. The following visual demonstrates the
Mexican brands that the company has the exclusive right to import,
market and sell in the United States.
Source: Company 10-K
STZ is the leading imported beer company which has eight of the
top fifteen top-selling imported beer brands. Within the company’s
portfolio of imported brands, Modela Especial is the best-selling
imported beer and the fourth best-selling beer overall. On top of
this, Modelo Especial is the fastest-growing major imported beer
brand in the United States. Corona Extra follows closely behind
Modela Especial being the second largest imported beer and the
seventh best-selling beer overall in the United States market.
The following graph demonstrates our revenue projections each
year for the beer segment. We have forecasted beer segment sales
growth to slow over our forecast period. We have forecasted growth
of only 3.7% in 2021E. This lower growth is largely due to limited
demand due to COVID-19 and further effects of the virus. In 2022,
we believe we will be out of the pandemic and have forecasted sales
to increase by 4.2%. Each year after we have projected sales to
decrease by 0.3% from the previous year’s growth.
Source: Company 10-K
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Wine & Spirits Segment
Constellation Brands is a leading, higher-end wine and spirits
company in the United States market. The company has a portfolio
that focuses on higher end, higher-margin, and higher-growth wine
& spirits brands. In the U.S., STZ has 16 of the top 100
top-selling wine brands. Some of the most well know are listed
below.
Source: Company 10-K
The following graph demonstrates our revenue projections each
year for the wine & spirits segment. As you can see, this
segment has experienced negative growth for the last 3 years. We
suspect that growth will continue to slow as the company sells off
and divests some of its wine portfolio brands.
We have forecasted growth to be -3.3% for 2021E. In 2022, after
the pandemic disruptions have passed, we see growth of -0.5% which
continues to decrease gradually to -0.9% in 2025E.
Source: Company 10-K
Geographic Breakdown
As we can see in the chart below, Constellation Brands has all
sales coming from North America. This includes a very significant
portion of revenue exposure in the United States with over 97.3% of
total revenue in 2020 and the remaining 2.7% coming from Canada, as
shown below.
Source: FactSet
As of now, we expect that STZ will continue to sell products
only within North America as they have in the past. Management has
given no further guidance for further expansion into regions
outside of the United States and Canada. However, we do believe
that STZ has the opportunity to grab a greater percentage of sales
from Canada if the company focused more on marketing in this
country.
Overall, we believe that the company has the ability to expand
internationally. However, this would include greater economic and
political risk to the company. We believe at this stage in the
company’s lifecycle they will continue to try and stay on top of
consumer preferences and focus on margin expansion through offering
higher quality products.
Going forward, we would like to carefully monitor STZ’s global
expansion and listen to company guidance on international growth.
Having such a large consumer base and breweries globally, much
higher growth prospects are on the horizon if STZ was to consider
international sales.
Cost Structure Analysis
The following graph demonstrates Constellation Brands TTM gross,
operating and net margins from the last ten years.
As you can see, STZ has been able to increase all margins across
the board since 2010. Notably, Constellation Brands has increased
gross margins from around 34.38% in 2010 to around 51% mid-way
through 2020. STZ was also able to increase their net margin from
3.9% in 2010 to around 13.45% in 2020. STZ expanded operating
margin from 9.45% in 2010 to 27.8% in 2020. By looking at this it
is clearly evident that STZ has put the largest focus on increasing
margins. The company has been continuing to exit out of cheap
portfolio brands where margins are lower and focusing on increasing
higher-margin brands both through acquisitions of smaller brewers
as well as organically in house through new product ideas.
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Source: Macrotrends
We have projected that STZ will have very minimal gross margin
expansion over the next five years. 2019 saw a year of very small
margin expansion which had gross margin increase only 0.2% from
50.4% in 2018 to 50.6% in 2019. However, in 2020 the company was
able to increase gross margin to 51.8%. We believe that this trend
of slow margin expansion will continue in our forecast period as
further increases in margin is limited. The company continues to
focus on higher margin, high-quality products, however, we believe
competition will continue to squeeze margins and make it difficult
for the company to further improve. STZ already had some of the
highest margins against its peers. However, as the company
continues to grow larger and increase production capacity, we
suspect the company will continue to benefit from greater economies
of scale and reduce COGS as a percentage of sales. We are also very
bullish on STZ management to continue acquiring new high-margin
brands.
Source: Company 10K
As shown above, we have projected gross margins to increase by
0.6% in our first forecast year (2021E) to 52.4%. We have projected
margins to continue to expand over the next four year and increase
to 53.1% in 2025E. We believe we are very conservative on these
margin expansion projections and still have a BUY price target. We
are very confident that management will be able to produce future
results above our projections.
Debt Maturity Analysis
Constellation Brands has a S&P credit rating of BBB.
Currently, STZ has around 27% of its capital structure in the form
of debt, as calculated in our WACC. We have forecasted this capital
structure to stay consistent throughout out forecast period. The
following table outlines Constellation Brands long-term debt
maturity schedule.
Five-Year Debt Maturity Schedule Fiscal Year Payment ($mil) 2021
$736.2 2022 1,682.2 2023 1,828.9 2024 1,393.8 2025 780.7 Thereafter
5,600.0 Total $12,021.8
Source: Company 10-K
As we can see, STZ has some relatively large debt maturities in
the next 5 years. For the debt that the company does have maturing,
we have forecasted cash flows each year that take into account this
debt maturity schedule. Currently, Constellation Brands has a small
amount of cash on hand which is not enough to pay off the debt that
is maturing. Thus, we believe that STZ will need to continue
refinancing the company’s existing debt when it matures. Due to the
current interest rate environment and low rates, we believe this
will be the most ideal strategy for the company.
ESG Analysis
STZ currently has an ESG score according to FactSet of 23.4,
which ranks the company in the 32nd percentile. The company has a
medium ranked controversy score, as well as risk score.
Under the MSCI ESG ratings scale which follows the same as bond
ratings, STZ is currently ranked a BB. The
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company’s BB rating has held consistent for the past five years.
The following demonstrates how Constellation Brands compares with
peers in different categories of ESG according to the MSCI rating
scale.
Source: MSCI
As we can see, the main areas of concern for STZ are the
company’s corporate governance and water stress. The company ranks
average in corporate behavior, product safety & quality, health
& safety, Packaging & waste, and carbon footprint. It is
important to note that STZ currently is not an ESG leader in any
category according to MSCI.
The company has noted they are making strategic investments in
water-saving technologies and wastewater treatment measures.
Multiple different STZ breweries have already significantly reduced
their ratio of water used per hectoliter of beer produced. For
example, the Obregon brewery water intensity rate of 3.34 liters of
water used per liter finished represents a decrease of 18% in water
from fiscal 2017. STZ continues to develop these same strategies
and goals in all of the company’s breweries.
The company boasts an employee base of 37.4% female and 46.5%
ethnic minorities. The company has a very good employee retention
with staff staying for an average of 3.6 years.
RECENT DEVELOPMENTS
Q2 2021FYE Earnings Announcement
Constellation Brands reported Q2 2021 fiscal year end results
for the quarter ended August 31, 2020. The company reported a
strong quarter which saw EPS come in a $2.76, which represents a
beat by $0.25. STZ revenue came in at $2.26 billion, which beat
consensus estimates by $75.49 million. This represented the 11th
consecutive quarter the company has reported earnings beat.
Even
with the COVID-19 pandemic, the company has continued to see
strong results helped by robust depletion growth within the
company’s beer business.
Sales
STZ’s Q2 earnings of $2.76 increased by 1% year over year.
However, excluding the impacts of Canopy Growth, the company posted
earnings of $2.91 per share. Net sales declined by 4% from the
previous year quarter to $2.26 billion. As shown below, sales were
flat for the company’s beer business in Q2 2021 at $1.64 billion.
This represented a 1.6% decline in shipment volume, which was
offset by 4.7% depletion growth.
Sales in the Wine & Spirits segment declined by 11% for the
quarter to $1.19 billion. Within Wine & Spirits, organic net
sales dropped 9% and saw a 19.4% decline in shipment volume, with a
3.3% fall in depletions.
Source: Alpha street
Margins
Overall, the adjusted gross profit declined 2% to $1.19 billion.
However, the adjusted gross profit margin expanded 110 bps to
52.5%. STZ’s operating income increased 1% to just below $800
million, which the operating margin improved 150 bps to 35.3%.
As for segment margins, the operating margin in the beer segment
expanded 70 bps to 42.5%. The Wine & Spirits segment saw
operating margin increase 310 bps to 25.9%.
We can clearly see here that beer sales have much higher margins
than wine & spirits. We believe this is a large reason why STZ
has been focusing on growth in the company’s beer segment and not
wine & spirits.
Financial Position
As of 2020FYE February 29th, the company has significantly
increased cash and cash equivalents on hand due to potential
negative impacts and pressures from COVID-19.
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As of end of Q2 2021, STZ had $204.6 million in cash, up
significantly from $81 million as of 2020 FYE. Long-term debt is
currently at $11.07 billion, as well as $11.69 million in
shareholders equity.
Throughout the first six months of fiscal 2021, STZ generated
operating cash flow of $1.4 billion and adjusted FCF of $1.17
billion.
The company announced a dividend of 75 cents per share for Class
A and 68 cents for Class B stock. The dividend will be paid to
shareholders on November 20. In 2015, STZ paid a dividend of only
31 cents which shows the dividend has more than doubled in the last
5 years.
Company Quarter Developments
Throughout the latest quarter, Constellation Brands acquired a
stake in Copper & Kings which helped expand the company’s
premium-spirits portfolio.
The company also announced a minority stake in Brooker
Vineyard’s, which is a direct-to-consumer (DTC) wine business. We
believe this will allow the company to further expand their DTC
business and e-commerce channels. This has been an important trend
for businesses as the world becomes more technologically focused
and online driven. We believe that the pandemic has only
accelerated this theme.
STZ’s management team has also stated the Wine & Spirits
transaction to divest a portion of the segment to E&J Gallo
Winery. It is assumed this transaction will close by the end of the
third quarter. The company has also agreed to sell the Paul Masson
Grande Amber Brandy brand. This is also expected to close by the
end of Q3. The company plans to keep the Cooks and J. Roget labels,
along with the Mission Bell Winery.
What we can determine from STZ recent transactions is that the
company is extremely active in the M&A space. The company
acquires new higher-end brands and makes other acquisitions to help
vertically integrate the company. It is important to continue
monitoring STZ M&A activity to ensure they are making value
adding acquisitions.
COVID-19 Impact & Outlook
Due to the impacts of COVID-19, STZ has not provided any future
guidance for 2021 FYE. That being said,
management has noted they remain optimistic about the company’s
brands and the resiliency on the business. We strongly agree with
this statement due to the fact of how well STZ and its products
have performed so far during the pandemic. It is likely the company
will see strong organic growth after the pandemic is over and
activities remain to normal. The company has noted that they will
have 50 days of inventory on hand in order to continue distributing
if forced to suspend operating. We do not believe that this will
become the case at this point in the virus’s lifecycle.
During the pandemic, shipment volumes and distributor inventory
levels were hit early due to the production slowdown of beer in
Mexico. We see this continuing to be an issue for the company as
they import products from outside of the United States. We believe
that shipment volumes and inventory levels will slightly slowdown
for the next year and have modeled this into our first-year
projections. After that, we believe these levels will return to
normal after the pandemic.
E-Commerce
In the company’s quarterly conference call, STZ announced the
e-commerce market for alcohol has exploded due to the pandemic,
growing 3-4 times in volume versus the prior year. The company
believes that this, as well as more DTC, represent key growth
drivers for the firm. This also means higher margins in the process
due to increased DTC sales. The company also stated they are
shifting significant resources and marketing dollars towards
continuing to expand digital sales channels. We believe this could
be a major growth driver for STZ in the future by realizing this
consumer trend before other competitors.
Canopy Growth
On May 1, 2020, STZ announced that it would be exercising
warrants which would give STZ a 38.6% stake in the cannabis
company. This represents a major increase from the 9.9% ownership
STZ had back in 2017 when the company first invested in the
Canadian marijuana producer. In 2018, the company also invested
another $4 billion into Canopy growth. As we can see, STZ continues
to have a lot of confidence in Canopy as sees a large opportunity
from growth potential in the market.
This all comes with the fact that Canopy Growth has recorded
losses in 5 straight quarters which have totaled a
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combined $2.2 billion Canadian dollars. This has significantly
weighed down STZ’s own results in the process.
Over a year and a half ago, Bruce Linton, co-CEO of Canopy, was
fired and STZ former CFO David Klein took over. Since then, the
company has focused much more on cost control and profitability,
rather than growth expansion. This was evident when the company
exited out of Markets in Africa and reduced their footprint in
Latin America. The company has also been making significant job
cuts, and also shut down two greenhouses in order to significantly
cut costs.
As the company continues to focus on cost cutting and becoming
profitable, it does not mean that there still is not extreme growth
potential for Canopy and STZ in the cannabis market. Constellation
CEO, Bill Newlands, stated "while global legalization of cannabis
is still in its infancy, we continue to believe the long-term
opportunity in this evolving market is substantial." We believe
that as the U.S. continues to shift to legalize cannabis, Canopy is
best positioned to capture the massive growth potential in the
market. Once Canopy becomes profitable, STZ will see strong
financial performance considering Canopy represents around 10% of
STZ total market capitalization.
U.S. Hard Seltzer Industry
Hard seltzers, commonly known as spiked seltzers, is one of the
fastest growing alcoholic beverage industries, not only in the U.S.
but around the world.
White Claw leads the hard seltzer market with over half of the
market share. Despite White Claw’s leading position, White Claw has
struggled to keep up with demand.
Although just recently starting to explode, hard seltzers
currently hold a very minimal market share in the entire alcohol
industry. That being said, sales of hard seltzers in North America
have been much higher than the rest of the world.
The graph below demonstrates the historical and projected
revenue growth within the U.S. hard seltzer market from 2016 to
2021.
Source: T4
As we can see, the size of the Hard Seltzer industry was $488
million in 2018 and grew by over 105% in 2019 to over $1 billion in
revenue. From 2016 to 2021, the industry is projected to grow at a
CAGR of 128%. It is important to note that the 2021 estimate was
before COVID-19 and the restrictions that came along with the
virus.
It is estimated that the short-term impact of COVID-19 may be
high, due to the fact that seltzers are most popular in the summer,
and shelter-in-place restrictions may slow demand and sales
channels.
Overall, we believe that the hard seltzer industry will offer a
tremendous growth potential for STZ. The company already has a
strong presence with its Corona Seltzers, and we believe the
company will continue to take market share as the industry
grows.
Markets & Competition
The alcoholic beverage industry is very competitive due to a
lack of specialization in products. After all, a beer is just a
beer. That being said, players in the industry are able to
differentiate themselves through different types of beer,
brewer/importer, brand image, and specialties. Due to this, the
industry is relatively fragmented and highly competitive.
Market Share
The following table demonstrates the change in market share
within the U.S. beer brewers & importers from 2009 to 2019. As
we can see, there have been significant shifts in the market share
among the top five competitors in the industry. Specifically, since
2009 more than nine percent of market share has shifted from larger
brewers and
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importers, to smaller brewers and importers. Thus, we can
conclude that the continued growth of small companies continues to
put competitive pressure on larger scale brewers and importers.
U.S. Brewers/Importers Market Share
Source: America’s Beer Distributors
It is important to note, out of the largest five
brewers/importers, only two have been able to increase market share
over time. One of which is Constellation Brands which saw market
share increase from 5% in 2019 to 10.6% in 2019. We believe that
STZ will continue to increase market share as the company stays
ahead of consumer demand changes and continues to tailor to higher
quality products with greater margins compared to peers.
Margins
As seen, companies in the alcoholic beverage industry have
relatively high margins. Constellation brands has one of the
highest gross margins well above the industry average of 44.3%.
There are only two other companies that have higher gross margins
than Constellation Brands which are Diageo and Anheuser-Busch.
Source: FactSet
As for EBITDA, EBIT, and Net margins, STZ has the highest
margins across the board and much higher than the industry
average.
It makes sense that STZ has very strong margins against its
peers as the company has put a large focus on higher-end, higher
margin products compared to its peers’ products.
Competitor Revenues
Compared to other players, STZ is on the smaller end of market
and enterprise value. As seen below, STZ’s market value is nearly
$19 billion lower than the peer average and nearly $33 billion
lower than the average enterprise value.
Source: FactSet
The same trend appears for sales of Constellation Brands
compared to its competitors. The company’s $8 billion in revenue is
far behind the industry leader Anheuser-Busch with over $47
billion. The industry average sales are $17.5 billion.
Looking at both of these metrics, we believe that STZ has large
potential to increase both revenues and sales. We see this as a
large positive because STZ has more growth potential being small in
scale compared to other industry competitors.
Valuation Metrics
STZ trades above industry averages in EV/Sales, however, on an
EV/EBIT multiple, Constellation Brands trades significantly below
the competitor average.
Source: FactSet
As for debt comparisons, Constellation Brands has a total
Debt/EBITDA of 3.61x. This is below the average of 3.8x. Looking at
total Debt/EV, STZ has 22.66% debt in its capital
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structure. This is also below the industry average of 29.15%.
This leads us to believe that compared to STZ’s closest peers, the
company is in a strong position with its balance sheet and has
significantly less debt than some other industry players.
ECONOMIC OUTLOOK
Consumer Confidence
The Consumer Confidence Index (CCI) is a predictive indicator of
consumer spending and also measures the optimism of citizens in the
United States. As mentioned, having a strong consumer is imperative
for a company like Constellation Brands which makes consumer
confidence an important economic indicator to look at when valuing
STZ.
The consumer confidence index declined slightly in October,
after seeing a sharp increase in September. As of October, the
current index stands at 100.9, which is down from 101.3 seen in
September.
The Present Situation Index, which measures the current business
and labor market conditions, increased from 98.9 in September to
104.6 in October. The Expectations Index, based on consumers’
short-term outlook for market conditions, decreased below 100
dropping from 102.9 in September, to 98.4 in October.
Although consumer spending has rebounded in recent months,
increasing concerns about the economic outlook amongst consumers is
predicted to slow spending in the coming months. However, we do
predict that consumer confidence will begin to increase in the near
short-term as the world begins to find more answers to COVID-19 and
a possible vaccination which has recently hit news headlines from a
couple of different healthcare companies. We believe that consumer
confidence will be positive in a year’s time and the Consumer
Confidence Index will continue to increase to stronger levels seen
pre-pandemic.
Real Gross Domestic Product (GDP)
Increased GDP will continue to drive consumer spending in the
global economy as well as the consumer sector making it a key
economic indicator for STZ. Real GDP is the most
important indicator of the U.S. economy which provides a clear
view into the growth of an economy while taking into account
inflation and deflation. It is noted that Personal consumption
expenditures account for around a 68% of the share of total
GDP.
From selling alcoholic beverages, STZ’s revenue is almost
entirely driven by consumer spending even though alcohol was
classified as an essential good throughout COVID-19. In 2019, the
US economy grew by 2.3%. With the current state of the Corona
virus, we expect slower global growth in the coming years. As seen
below, Q1 2020 GDP was -5%, Q2 2020 GDP was -31.4%, but Q3 saw a
large increase up around 33.1% on an annualize basis.
Source: U.S. Bureau of Economic Analysis
We expect growth to take hit this year due to worldwide
shutdowns seen in the first two quarters of 2020, even though Q3
saw a large increase. We estimate that Q4 GDP will rise around 15%
and for the year ended 2020, GDP will be around -5%. We expect the
U.S. to remain in a lower growth environment until a new vaccine
comes out. We expect the U.S. economy to return back to rates
around the 2% level in 2022. We estimate growth to stay steady
around this level for the following years, before increasing
slightly to the most recent five-year GDP average of 2.3% in the
long run.
Unemployment Rate
In October, the unemployment rate declined by 1% to 6.9% and the
total number of unemployed persons fell by 1.5 Million to 11.1
million. Both of these measures have declined in the past six
months, however, both numbers are nearly double the levels seen in
February at 3.5% and 5.8 million. We expect that the unemployment
rate will continue to decrease as concerns of COVID-19 fade away.
We expect that unemployment levels will return to around
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4-5% within the next year before leveling off around 4% in 2
years.
Source: BLS
Interest Rates
The Fed Funds Rate currently stands at 0.25%. As seen in the
graph below, starting in the second half of 2019, the FED
significantly cut rates. The Fed Funds rate was 2.5% in the start
of 2019.
Source: FED
The FED cut rates as the economy suffered and the market outlook
was very gloomy due to COVID-19. Cutting rates helps project
economic growth as it allows firms to borrow capital at a cheaper
cost and also used to encourages increased consumer spending.
VALUATION
Revenue
Our total revenue forecasts are slightly above consensus
estimates. The following demonstrates our projected five-year
CAGR’s for each of STZ’s products, as well as overall revenue.
We have a projected CAGR of 3.73% within the beer segment. The
company has seen strong results in the beer segment with double
digit growth each of the past five years, with 2020 growth of 8%
being the only exception. We have forecasted growth to slow in 2021
due to the ongoing effects of COVID-19. However, we have projected
growth to increase in 2022 before slowly decelerating minimally
each year after.
We have a projected CAGR of -1.23% for the wine & spirits
segment. During the most recent three years, this segment has seen
negative growth each year. We have projected negative growth of
3.3% in 2021.
For total revenue, we have forecasted a CAGR of 2.22% over the
next five years for total revenue. We have forecasted a CV growth
rate of 1.6% in 2025.
Weighted Average Cost of Capital
We calculated a WACC of 5.26%, which we kept constant through
the forecast period. We have also assumed that the company keeps a
consistent capital structure as a percentage of non-cash assets.
Currently, STZ has 27.11% debt in their capital structure.
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Cost of Debt
We calculated an after-tax cost of debt of 2.36%. We used a
pre-tax cost of debt of 3.07% which was the YTM on a current
25-year STZ bond. We used a marginal tax rate of 23%. The current
risk-free rate on a 10-year US Treasury is 0.78%. This implied a
default premium of 2.29% on STZ’s debt.
Cost of Equity
We calculated a cost of equity of 6.34% using the CAPM equation.
We used an Equity Risk Premium of 5.15% which was the consensus
Henry Fund estimate. We calculated the cost of equity this using
the historical 5-year monthly beta of 1.08 and a risk-free rate of
0.78%.
Models
Discounted Cash Flow (DCF)
Our discounted cash flow and economic profit analysis calculated
our target price of $253 using the various assumptions discussed.
The assumptions used reflected our overall opinions on the growth
of the company’s segments. The current average consensus target
price from STZ is around $218, representing we are more bullish
than other analysts.
We have put the most emphasis on our DCF model, as we believe
the DCF most accurately captures STZ’s intrinsic value due to the
fact that we were able to construct varying operating scenarios and
capture range of different variables that affect STZ’s share price.
Looking at a range of different operating scenarios, STZ continues
to project a target price above what they are currently trading
at.
Relative Model
Using the relative valuation model, we compared STZ with Diageo,
Heineken, Molson Coors, Anheuser-Busch InBev, and Boston Beer
Company. When analyzing peers, these companies have a similar
business model and sell relatively similar products. The company
also stated in their 10K that these are the major competitors the
firm faces. On a one year forward P/E basis, STZ trades
significantly below the peer average at 18.9x versus the industry
average of 34.82x. On a two year forward basis, STZ trades just
below the average of 24.43x. We decided
to use the one year forward P/E, so the valuation is not
disrupted from COVID-19 impacts. Using the one year forward P/E
ratio, we calculated an implied share price of $248.
Valuation Summary
After analysis, the Henry Fund believes that STZ is currently
trading below our forecasted intrinsic value of $240 per share. We
are recommending a BUY with a potential 30% upside.
KEYS TO MONITOR
Going forward it is imperative to monitor the company’s
investment in Canopy Growth in which the company currently holds a
38.6% stake in. Canopy has continued to struggle with being
profitable and has recorded numerous consecutive quarters of
unprofitability. However, we see a tremendous growth potential
within the Cannabis industry. We believe with the new CFO coming
from STZ, the company will continue putting a large emphasis on
cost cutting measures rather than focusing on growth as Canopy has
been burning through cash. We believe that once cannabis becomes
legal in all of North America, Canopy is best positioned to
capitalize on the extreme growth prospects of the industry.
We also believe that it is crucial for STZ to continue focusing
on higher margin products. This is where the company specializes in
and sets itself apart from peers. We expect that consumer
preferences will continue to shift to more high-quality alcohol
products. However, if consumer preferences shift opposite, it is
imperative to monitor sales growth. If preferences change, STZ
might suffer from its higher-end, higher-margin product
offerings.
Beer sales continue to be imperative to the company’s growth.
This has been their strongest segment and we have forecasted beer
sales to continue to grow, while wine & spirits see negative
growth. If beer starts to become out of fashion, STZ will not be
positioned well due to divesting and selling off some of their wine
brands and decreasing growth they have recently seen.
Currently, STZ is trading at around $185 per share. We believe
that our target range of $230-260 is slightly above consensus.
Thus, if the price of STZ is to reach $230, we might change our
current recommendation and revisit the model.
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Page12
REFERENCES
1. 10K 2. 10Q 3. 2020 Investor Presentation 4. Earnings
Transcript 5. FactSet 6. Bloomberg 7.
https://www.macrotrends.net/stocks/charts/STZ
/constellation-brands-inc/profit-margins 8.
https://www.bea.gov/news/2020/gross-
domestic-product-third-quarter-2020-advance-estimate
9. https://www.bls.gov/news.release/pdf/empsit.pdf
10.
https://www.nasdaq.com/articles/constellation-brands-stz-beats-on-q2-earnings-sales-2020-10-01
11.
https://news.alphastreet.com/constellation-brands-nyse-stz-q2-2021-earnings-infographic/
12. https://www.t4.ai/industry/hard-seltzer-market-share
13.
https://marketrealist.com/2020/07/constellation-still-believes-canopy-growth-should-you/
14.
https://www.fool.com/investing/2020/05/10/constellation-brands-just-increased-its-stake-in-c.aspx
15.
https://www.prnewswire.com/news-releases/canopy-growth-reports-second-quarter-fiscal-2021-financial-results-301168310.html
DISCLAIMER
Henry Fund reports are created by graduate students in the
Applied Securities Management program at the University of Iowa’s
Tippie College of Business. These reports provide potential
employers and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities of our
students. Henry Fund analysts are not registered investment
advisors, brokers or licensed financial professionals. The
investment opinion contained in this report does not represent an
offer or solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts
and figures included in this report are from publicly available
sources. This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the University of
Iowa, its faculty, staff, students, or the Henry Fund may hold an
investment position in the companies mentioned in this report.
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Constellation Brands, Inc.Revenue Decomposition
Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E
2024E 2025E
BeerShipment Volume 268.00 294.10 311.9 318.1 326.1 333.4 340.1
346.0Revenue per case 17.39 17.69 18.01 18.31 18.61 18.91 19.20
19.49
Beer Net Sales 4,660.40 5,202.10 5,615.90 5,825.60 6,069.76
6,305.63 6,531.44 6,745.43 Growth 10.2% 11.6% 8.0% 3.7% 4.2% 3.9%
3.6% 3.3%
Growth in Beer Cases Sold 8.8% 9.7% 6.1% 2.0% 2.5% 2.3% 2.0%
1.8%Growth in Revenue per Beer Case 1.3% 1.7% 1.8% 1.7% 1.7% 1.6%
1.6% 1.5%
Wine and SpiritsShipment Volume 59.00 58.50 53.6 50.92 49.70
48.41 47.05 45.64Revenue per case 49.49 49.81 50.89 51.80 52.79
53.84 54.97 56.18
Wine and Spirits Net Sales 2,919.90 2,913.90 2,727.60 2,637.86
2623.47 2606.36 2586.59 2564.19Growth -5.9% -0.2% -6.4% -3.3% -0.5%
-0.7% -0.8% -0.9%
Growth in Wine & Spirit Cases Sold -14.7% -0.8% -8.4% -5.0%
-2.4% -2.6% -2.8% -3.0%Growth in Revenue per Wine &Spirit Case
10.4% 0.6% 2.2% 1.8% 1.9% 2.0% 2.1% 2.2%
Total Net Sales 7,580.30 8,116.00 8,343.50 8,463.46 8,693.23
8,912.00 9,118.03 9,309.61 Growth in Total Net Sales 3.4% 7.1% 2.8%
1.4% 2.7% 2.5% 2.3% 2.1%
Segment Percentage of Total SalesBeer 61.5% 64.1% 67.3% 68.8%
69.8% 70.8% 71.6% 72.5%Wine and Spirits 38.5% 35.9% 32.7% 31.2%
30.2% 29.2% 28.4% 27.5%
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Constellation Brands, Inc.Income Statement
Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E
2024E 2025E
Sales 7,586.4 8,115.6 8344 8,463.5 8,693.2 8,912.0 9,118.0
9,309.6 Cost of Goods Sold (COGS) 3,373.6 3,566.1 3589.3 3,619.5
3,696.1 3,766.8 3,831.1 3,888.3 Depreciation 294.0 333.0 326.5
354.6 381.1 403.9 423.4 440.0 Amortization 93.0 114.0 105 108.8
104.4 100.2 96.2 92.4 Gross Income 3,826.3 4,102.5 4323.2 4,380.6
4,511.7 4,641.0 4,767.3 4,889.0 SG&A Expense 1,378.1 1,449.5
1553 1,523.4 1,564.8 1,604.2 1,641.2 1,675.7 EBIT (Operating
Income) 2,448.2 2,652.9 2770.2 2,857.2 2,946.9 3,036.9 3,126.0
3,213.3 Nonoperating Income - Net 493.9 2,076.9 -2563 - - - - -
Interest Expense 336.5 414.1 429 409.0 414.4 416.5 424.8 427.7
Unusual Expense - Net 262.9 170.7 724 - - - - - Income Taxes 11.9
685.9 -967 563.1 582.5 602.7 621.3 640.7 Consolidated Net Income
2,330.8 3,459.1 21.2 1,885.1 1,950.0 2,017.7 2,080.0 2,144.9
Minority Interest 11.9 23.2 33.0 33.0 33.0 33.0 33.0 33.0 Net
Income 2,318.9 3,435.9 -11.8 1,852.1 1,917.0 1,984.7 2,047.0
2,111.9 Per Share
Basic EPS (recurring) 11.3 18.2 2.61 9.8 10.2 10.5 10.9 11.3
Dividends per Share 2.08 2.96 3.00 3.15 3.31 3.47 3.65 3.83 Total
Shares Outstanding 191.4 191.3 192.8 192.2 191.7 191.3 191.0
190.5
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Constellation Brands, Inc.Balance Sheet
Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E
2024E 2025E
AssetsCash & Cash Equivalents 90 94 81 1,375 2,220 3,010
4,078 5,051
Short-Term Receivables 1,107 1,268 1,215 1,173 1,218 1,295 1,324
1,331 Inventories 2,084 2,130 1,374 2,118 2,119 2,132 2,116 2,104
Other Current Assets 193 192 814 356 390 416 465 525
Total Current Assets 3,474 3,684 3,484 5,022 5,947 6,852 7,983
9,011 Net Property, Plant & Equipment 4,790 5,267 5,814 6,353
6,848 7,303 7,720 8,105 Total Investments and Advances 777 6,700
4,211 4,244 4,277 4,310 4,344 4,378 Goodwill 8,083 8,089 7,757
7,757 7,757 7,757 7,757 7,757 Intangible Assets 3,305 3,198 2,719
2,610 2,506 2,406 2,309 2,217 Other Assets 110 2,293 3,337 3,300
3,303 3,297 3,282 3,258
Total Assets 20,539 29,232 27,322 29,287 30,638 31,925 33,395
34,725 Liabilities & Shareholders' Equity
Current Portion of LT Debt 769 1,857 1,051 1,474 1,358 1,206
1,258 1,177 Accounts Payable 592 617 558 614 643 655 662 669 Income
Tax Payable 49 25 25 45 45 45 45 45 Other Current Liabilities 535
666 679 675 678 698 729 740
Total Current Liabilities 1,945 3,164 2,312 2,808 2,724 2,604
2,694 2,631 Long-Term Debt 9,418 11,760 11,694 11,850 12,142 12,362
12,578 12,753 Deferred Tax Liabilities 718 1,269 660 845 874 904
932 961 Other Liabilities 395 202 183 248 262 282 252 262
Total Liabilities 12,476 16,394 14,849 15,750 16,002 16,152
16,455 16,607
Common Equity and Additional Paid-In Capital 2,828 1,413 1,517
1,620 1,722 1,825 1,928 2,010 Retained Earnings 9,245 14,563 14,036
15,282 16,565 17,886 19,236 20,618 Accumulated Other Comprehensive
Income (loss) -203 -354 (266) (266) (266) (266) (266) (266)
Treasury Stock -3,807 -2,784 (2,814) (3,100) (3,386) (3,672)
(3,958) (4,244)
Total Shareholders' Equity 8,063 12,838 12,473 13,536 14,636
15,773 16,940 18,118 Total Liabilities & Shareholders' Equity
20,539 29,232 27,322 29,287 30,638 31,925 33,395 34,725
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Constellation Brands, Inc.Historical Cash Flow Statement
Fiscal Years Ending Feb. 28 2015 2016 2017 2018 2019
2020Operating Activities
Net Income 836.2 1,060.6 1,539.2 2,330.8 3,459.1
21.4Depreciation, Depletion & Amortization 202.0 221.0 293.9
386.5 447.1 431.5Deferred Taxes & Investment Tax Credit 79.3
251.0 128.7 114.9 426.9 -1153.7Other Funds 69.3 67.1 -193.6 -598.7
-2,015.1 3261.9Changes in Working Capital -105.8 -186.0 -72.2
-302.1 -71.7 -10Net Operating Cash Flow 1,081.0 1,413.7 1,696.0
1,931.4 2,246.3 2551.1
Investing ActivitiesCapital Expenditures -719.4 -891.3 -907.4
-1,057.6 -886.3 -726.5Net Assets from Acquisitions -310.3 -1,316.4
-1,111.0 -155.1 -45.6 -36.2Sale of Fixed Assets & Businesses
0.0 25.0 575.3 0.0 72.3 278Purchase/Sale of Investments 0.0 0.0 0.0
-191.3 -3,971.3 -46.7Other Funds 13.8 0.3 -18.7 -19.1 -0.9 0.4Net
Investing Cash Flow -1,015.9 -2,182.4 -1,461.8 -1,423.1 -4,831.8
-531
Financing ActivitiesCash Dividends Paid 0.0 -241.6 -315.1 -400.1
-557.7 -569.2Change in Capital Stock 63.7 79.2 -1,063.0 -989.1
-441.1 28.2Issuance/Reduction of Debt, Net 298.6 748.6 1,176.8
819.7 3,605.7 -1464.8Other Funds -378.7 164.8 66.5 -31.7 -13.6
-25.6Net Financing Cash Flow -16.4 751.0 -134.8 -601.2 2,593.3
-2031.4
Exchange Rate Effect -2.50 -9.30 -5.10 5.80 -4.50 -0.9
Net Change in Cash 46.20 -27.00 94.30 -87.10 3.30 -12.2Beg. Cash
64 110 83 178 90 94End Cash 110.2 83.2 177.5 90.4 93.7 81.5
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Constellation Brands, Inc.Forecasted Cash Flow Statement
Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E 2025E
Net Income 1852 1917 1985 2047 2112Operating Activities
Depreciation 355 381 404 423 440Amortization 109 104 100 96
92Change in Receivables 42 -45 -77 -29 -7Change in Inventories -744
-1 -12 15 12Change in Other Current Assets 458 -33 -26 -49
-61Change in Accounts Payable 57 29 12 7 8Change in Income Tax
Payable 20 0 0 0 0Change in Other Current Liabilities -4 3 20 30
11Change in Deferred Taxes 185 29 30 28 29
Net Cash from Operating Activities 2328 2384 2435 2570
2636(Increase) Decrease in Investments -33 -33 -33 -34 -34Capital
Expenditures -894 -876 -858 -841 -824Change in Other Assets 37 -3 6
15 24Change in Other Liabilities 65 14 20 -31 10
Net Cash from Investing Activities -825 -897 -866 -891
-824Change in Current Portion of LT Debt 424 -116 -152 53 -81Change
in Long-Term Debt 156 292 220 216 175Repurchase of Common Stock
-286 -286 -286 -286 -286Proceeds from Stock Issuance 103 103 103
103 82Dividend Payments -606 -634 -664 -696 -730
Net Cash from Financing Activities -209 -642 -780 -611 -840
Net Change in Cash 1294 845 790 1068 973
Beginning Cash Balance 81.0 1,374.5 2,219.8 3,009.6 4,078.0
Ending Cash Balance 1,374.5 2,219.8 3,009.6 4,078.0 5,050.9
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Constellation Brands, Inc.Common Size Income Statement
Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E
2024E 2025E
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
100.00%Cost of Goods Sold (COGS) 44.47% 43.94% 43.02% 42.77% 42.52%
42.27% 42.02% 41.77%Depreciation 3.88% 4.10% 3.91% 4.19% 4.38%
4.53% 4.64% 4.73%Amortization 1.23% 1.40% 1.26% 1.29% 1.20% 1.12%
1.06% 0.99%Gross Income 50.44% 50.55% 51.81% 51.76% 51.90% 52.08%
52.28% 52.52%SG&A Expense 18.17% 17.86% 18.61% 18.00% 18.00%
18.00% 18.00% 18.00%EBIT (Operating Income) 32.27% 32.69% 33.20%
33.76% 33.90% 34.08% 34.28% 34.52%Nonoperating Income - Net 6.51%
25.59% -30.72% 0.00% 0.00% 0.00% 0.00% 0.00%Interest Expense 4.44%
5.10% 5.14% 4.83% 4.77% 4.67% 4.66% 4.59%Unusual Expense - Net
3.47% 2.10% 8.68% 0.00% 0.00% 0.00% 0.00% 0.00%Income Taxes 0.16%
8.45% -11.59% 6.65% 6.70% 6.76% 6.81% 6.88%Consolidated Net Income
30.72% 42.62% 0.25% 22.27% 22.43% 22.64% 22.81% 23.04%Minority
Interest 0.16% 0.29% 0.40% 0.39% 0.38% 0.37% 0.36% 0.35%Net Income
30.57% 42.34% -0.14% 21.88% 22.05% 22.27% 22.45% 22.69%Per Share
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Basic EPS
(recurring) 0.15% 0.22% 0.03% 0.12% 0.12% 0.12% 0.12%
0.12%Dividends per Share 0.03% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%
0.04%Total Shares Outstanding 2.52% 2.36% 2.31% 2.27% 2.21% 2.15%
2.09% 2.05%
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Constellation Brands, Inc.Value Driver Estimation
Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E
2024E 2025E
NOPLAT:Sales 7,586 8,116 8,344 8,463 8,693 8,912 9,118 9,310
Less: Cost of Goods Sold 3,374 3,566 3,589 3,620 3,696 3,767 3,831
3,888 Less: SG&A Expenses 1,378 1,450 1,553 1,523 1,565 1,604
1,641 1,676 Less: Depreciation 294 333 327 355 381 404 423 440
Less: Amortization 93 114 105 109 104 100 96 92 Plus: Implied
Interest on Operating Leases 13 14 14 18 19 20 22 23 EBITDA 2,460
2,667 2,785 2,875 2,966 3,057 3,148 3,237 Adjusted Taxes:Marginal
Tax Rate 4.8% 18.5% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00%Income
Tax Expense 12 686 -967 563 582 603 621 641Plus: Tax Shield on
Interest Expense 16 77 99 94 95 96 98 98Plus: Tax Shield on Unusual
Expense 13 32 167 0 0 0 0 0Plus: Tax Shield on Op. Lease Interest 1
3 3 4 4 5 5 5Less: Tax on Nonoperating Income -24 -384 589 0 0 0 0
0Less: Total Adjusted Taxes 18 412 -109 661 682 703 724 744Plus:
Change in DTL -415 550 -609 185 29 30 28 29NOPLAT 2,027 2,805 2,285
2,398 2,313 2,384 2,452 2,521
Invested Capital (IC):Normal Cash 90 94 81 339 348 356 365
372A/R 1,107 1,268 1,215 1,173 1,218 1,295 1,324 1,331Inventory
2,084 2,130 1,374 2,118 2,119 2,132 2,116 2,104Other Current Assets
193 192 814 356 390 416 465 525Non Interest Bearing Current
Liab.Less: A/P 592 617 558 614 643 655 662 669Less: Income Taxes
Payable 49 25 25 45 45 45 45 45Less: Other Current Liab. 535 666
679 675 678 698 729 740Operating Working Capital 2,298 2,377 2,223
2,652 2,709 2,801 2,834 2,879
Plus: Net PPE 4,790 5,267 5,814 6,353 6,848 7,303 7,720
8,105Plus: Net Intangibles 3,305 3,198 2,719 2,610 2,506 2,406
2,309 2,217Plus: PV of Operating Lease 462 466 583 624 667 714 764
818Plus: Other Assets 110 2,293 3,337 3,300 3,303 3,297 3,282
3,258Plus: Other LT Operating Assets 8,667 11,224 12,453 12,887
13,324 13,719 14,076 14,397
Less: Other LT Operating Liab. 395 202 183 248 262 282 252
262
Invested Capital 10,570 13,399 14,492 15,292 15,770 16,238
16,658 17,014
Free Cash Flow (FCF):NOPLAT 2,027 2,805 2,285 2,398 2,313 2,384
2,452 2,521 Change in IC 825 2,830 1,093 799 479 468 420 356FCF
1,203 (25) 1,192 1,599 1,834 1,917 2,031 2,166
Return on Invested Capital (ROIC):NOPLAT 2,027 2,805 2,285 2,398
2,313 2,384 2,452 2,521 Beg. IC 9,745 10,570 13,399 14,492 15,292
15,770 16,238 16,658ROIC 20.80% 26.54% 17.05% 16.55% 15.13% 15.12%
15.10% 15.14%
Economic Profit (EP):Beg. IC 9,745 10,570 13,399 14,492 15,292
15,770 16,238 16,658x (ROIC - WACC) 15.54% 21.28% 11.79% 11.29%
9.86% 9.86% 9.84% 9.87%EP 1,514 2,249 1,580 1,636 1,508 1,554 1,597
1,645
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Weighted Average Cost of Capital (WACC) Estimation
Cost of Equity: ASSUMPTIONS:Risk-Free Rate 0.78% 10 yr
TresuryBeta 1.08 5yr monthlyEquity Risk Premium 5.15% HF
estimateCost of Equity 6.34%
Cost of Debt:Risk-Free Rate 0.78% 10 yr TresuryImplied Default
Premium 2.29%Pre-Tax Cost of Debt 3.07% 25yr STZ bond YTMMarginal
Tax Rate 23%After-Tax Cost of Debt 2.36%
Market Value of Common Equity: MV WeightsTotal Shares
Outstanding 192.84Current Stock Price $185.78MV of Equity 35,825.97
72.89%
Market Value of Debt:Current Portion of LTD 1,050.60 Long-Term
Debt 11,694.00 PV of Operating Leases 582.96 MV of Total Debt
13,327.56 27.11%
Estimated WACC 5.26%
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Constellation Brands, Inc.Discounted Cash Flow (DCF) and
Economic Profit (EP) Valuation Models
Key Inputs: CV Growth of NOPLAT 1.60% CV Year ROIC 15.14% WACC
5.26% Cost of Equity 6.34%
Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E 2025E
DCF Model:Free Cash Flow (FCF) 1599.3 1834.2 1917.0 2031.5
2165.5Continuing Value (CV) 61550.8PV of FCF 1519.3 1655.4 1643.6
1654.6 50133.1
Value of Operating Assets: 56,606 Non-Operating AdjustmentsAdd:
Excess cash - Add: Total investments & advances 4,211 Less: ST
debt (1,051) Less: LT debt (11,694) Less: PV of Operating Lease
(583) Less: ESOP (331)
Value of Equity 47,159 Shares Outstanding 192.8Intrinsic Value
of Last FYE 244.55$ Implied Price as of Today 252.59$
EP Model:Economic Profit (EP) 1635.6 1508.1 1554.4 1597.2
1644.6Continuing Value (CV) 44892.6PV of EP 1553.8 1361.0 1332.7
1300.9 36565.0
Total PV of EP 42,113 Invested Capital (last FYE) 14,492 Value
of Operating Assets: 56,606 Non-Operating AdjustmentsAdd: Excess
cash - Add: Total investments & advances 4,211 Less: ST debt
(1,051) Less: LT debt (11,694) Less: PV of Operating Lease (583)
Less: ESOP (331)
Value of Equity 47,159 Shares Outstanding 192.8Intrinsic Value
of Last FYE 244.55$ Implied Price as of Today 252.59$
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Constellation Brands, Inc.Dividend Discount Model (DDM) or
Fundamental P/E Valuation Model
Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E CV 2025E
EPS 9.81$ 10.17$ 10.55$ 10.89$
Key Assumptions CV growth of EPS 3.00% CV Year ROE 11.66% Cost
of Equity 6.34%
Future Cash Flows P/E Multiple (CV Year) 22.22 EPS (CV Year)
11.26$ Future Stock Price 250.15$ Dividends Per Share 3.15 3.31
3.47 3.65 250.15$ Discounted Cash Flows 2.96 2.92 2.89 2.85
195.60
Intrinsic Value as of Last FYE 207.23$ Implied Price as of Today
214.05$
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Constellation Brands, Inc.Relative Valuation Models
EPS EPSTicker Company Price FYE+1 FYE+2 P/E 20 P/E 21DGE Diageo
$38.64 $1.43 $1.64 27.02 23.56 HEIA Heineken $101.90 $2.42 $4.12
42.11 24.73 TAP Molson Coors $42.79 $4.15 $4.16 10.31 10.29 BUD
Anheuser-Busch InBev $66.52 $2.01 $3.15 33.09 21.12 SAM Boston Beer
Company $963.45 $15.59 $22.69 61.80 42.46
Average 34.87 24.43
STZ Constellation Brands $185.78 $9.81 $10.17 18.9 18.3
Implied Relative Value: P/E (EPS20) $ 341.89 P/E (EPS21)
248.47$
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Constellation Brands, Inc.Effects of ESOP Exercise and Share
Repurchases on Common Stock Account and Number of Shares
Outstanding
Number of Options Outstanding (shares): 4.53Average Time to
Maturity (years): 4.80Expected Annual Number of Options Exercised:
0.94
Current Average Strike Price: 108.87$ Cost of Equity:
6.34%Current Stock Price: $185.78
Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E
2025EIncrease in Shares Outstanding: 0.9 0.9 0.9 0.9 0.8Average
Strike Price: 108.87$ 108.87$ 108.87$ 108.87$ 108.87$ Increase in
Common Stock Account: 102.6 102.6 102.6 102.6 82.1
Change in Treasury Stock 286 286 286 286 286Expected Price of
Repurchased Shares: 185.78$ 197.56$ 210.09$ 223.42$ 237.58$ Number
of Shares Repurchased: 1.5 1.4 1.4 1.3 1.2
Shares Outstanding (beginning of the year) 192.8 192.2 191.7
191.3 191.0Plus: Shares Issued Through ESOP 0.9 0.9 0.9 0.9
0.8Less: Shares Repurchased in Treasury 1.5 1.4 1.4 1.3 1.2Shares
Outstanding (end of the year) 192.2 191.7 191.3 191.0 190.5
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Constellation Brands, Inc.Valuation of Options Granted under
ESOP
Current Stock Price $185.78Risk Free Rate 0.78%Current Dividend
Yield 1.49%Annualized St. Dev. of Stock Returns 22.10%
Average Average B-S ValueRange of Number Exercise Remaining
Option of OptionsOutstanding Options of Shares Price Life (yrs)
Price GrantedRange 1 4.5254 108.87 4.80 73.09$ 331$
Total 5 108.87$ 4.80 84.62$ 330.76$
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Constellation Brands, Inc.Present Value of Operating Lease
Obligations
Fiscal Years Ending Feb. 28 2016 2017 2018 2019 2020Year 1 48.8
41.6 53.6 59.0 94.1Year 2 39.9 46.8 53.7 58.2 81.8Year 3 32.9 45.2
50.3 51.1 68.9Year 4 28.6 43.2 44.0 47.9 61.3Year 5 26.5 35.4 41.3
41.2 51.0Thereafter 178.6 285.5 316.3 302.1 329.7Total Minimum
Payments 355.3 497.7 559.2 559.5 686.8Less: Cumulative Interest
55.4 88.8 97.1 93.5 103.8PV of Minimum Payments 299.9 408.9 462.1
466.0 583.0
Implied Interest in Year 1 Payment 44.4 9.2 12.6 14.2 14.3
Pre-Tax Cost of Debt 3.07% 3.07% 3.07% 3.07% 3.07%Years Implied
by Year 6 Payment 6.7 8.1 7.7 7.3 6.5Expected Obligation in Year 6
& Beyond 26.5 35.4 41.3 41.2 51
Present Value of Lease PaymentsPV of Year 1 47.3 40.4 52.0 57.2
91.3PV of Year 2 37.6 44.1 50.5 54.8 77.0PV of Year 3 30.0 41.3
45.9 46.7 62.9PV of Year 4 25.3 38.3 39.0 42.4 54.3PV of Year 5
22.8 30.4 35.5 35.4 43.8PV of 6 & beyond 136.8 214.5 239.1
229.4 253.6Capitalized PV of Payments 299.9 408.9 462.1 466.0
583.0
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