Market Overly Optimistic on Constellation Brands

We will likely raise our $117 fair value estimate roughly 5% for narrow-moat

Constellation’s beer revenue growth remained impressive in the quarter, climbing 20% on 15% organic gains and 5% contribution from the Ballast Point acquisition. But we don’t expect this level of growth to persist, given more difficult year-over-year comparisons upcoming in the second half of the fiscal year, and management’s own outlook for 16% to 17% top-line gains (a tighter range than a prior 14% to 17%) similarly suggests a low-teens growth rate for the next two quarters. Looking over the next five years, we’re still comfortable with our high-single-digit annual forecast--still well above the U.S. beer industry’s low-single-digit rate, but continuing to slow from its current breakneck pace.

We also note that despite better profitability improvement than we had expected, owing to continued volume leverage, strong pricing (in line with our expectations), and increased in-house beer production, Constellation’s free cash flow will remain challenged over the next several quarters as it rapidly expands its brewing capacity.

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