Constellation Brands: Can the incredible run continue?

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Julian Close 09/01/2014

Constellation Brands ( STZ ) is an international distributer of beer and wine, and one that has been growing rapidly over the last 14 months or so. The good times started for the company back in June of 2013, when Anheuser-Busch InBev ( BUD ) acquired Groupo Modelo. The US Justice Department allowed the acquisition, but on the condition that AB InBev first sell its Mexican beers and a Mexican brewery. AB InBev was in no mood for delays, and sold the assets to Constellation for $5.3 billion, which, it turns out, was a great deal for Constellation.

Those assets include what is now Constellation's brightest star, Corona. Though mega-mass produced and excoriated by reviewers, Corona has been embraced by college-age drinkers as if it were in some way an alternative to typical American beer. Yet Corona is not a craft beer, not a seasonal beer, not a mysterious Belgian, not a pop-you-eyes open IPA, not a hit-you-over-the-head stout… it's just watery beer. In fact, Corona is one of the only beers typically consumed with lemon or lime added, and that is large part due to the absence of any real flavor for the citrus to clash with.

And yet, somehow, Corona sales continue to climb, STZ stock climbs with it. From $43.43 per share after the deal was announced, STZ has risen almost exactly 100% to $80.87. If Constellation can be said to have any "secret" for this success, it is pure marketing. Corona remains the undisputed champion beer of all things sunny and beachy. The formula continues to draw in new customers, in spite of (or perhaps because of?) the fact that drinking beer on most beaches is, as the nice officer once informed me, "a go-to-jail thing."

Though Corona is an awfully light beer, that doesn't stop people from buying and consuming Corona Light, which is presumably lighter than Corona in calorie and alcohol content, although to be lighter tasting, it would have to be drawn directly from the primordial void. Corona Light sales are also soaring, and the sales are not coming from where you would imagine. Constellation has been making deep inroads into bars and restaurants, putting Corona and Corona light on tap, and in bars across the country, people are buying more and more draft Corona Light. Either this was a brilliant stroke of "let's give them the opposite of what they think they want" marketing, or Constellation was concerned that in direct sunlight, Corona Light might be indistinguishable from seltzer water.

I kid, of course. For our purposes it doesn't really matter how Constellation managed to increase sales of Corona so dramatically. As long as they don't drop off sharply, we should be OK, and while the reason for Corona's huge sales upswing is due almost entirely to a well aimed advertising campaign that constantly pairs two images, (Corona, beach. Beach, Corona) it should be all the more resilient for being so inexplicable.

Hedge Fund manager Daniel Loeb has been buying STZ stock for years, and Loeb, at least, believes the stock's run is not over; Loeb recently added to the size of his STZ position by picking up 2.2 million shares.

The numbers here are almost too good: quarterly revenue growth year-over-year of 126.6%, quarterly earnings growth year-over-year of 290.7%, a P/E Ratio of 8.85, and spectacular profit margin of 36.7%. In light of this, and Constellation's apparently preternatural ability to tap into the psyche's of the young, the chance of any near-term drop in the price of STZ stock appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the October 75/80 bull-put credit spread for at least a $0.35 credit. You will need to use limit orders to place this trade. This trade has a target return of 7.5% over 47 days, which is an annualized return of 58.5%. STZ stock has to fall 7.9% to cause a problem. Be aware that this is an aggressive trade and best undertaken by investors with diverse portfolios and high tolerance for risk.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: STZ , BUD

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