On Jan 27, we downgraded the world's largest wine company,
Constellation Brands Inc
), to Neutral with a target price of $80.00.
Though Constellation Brands posted overall strong
third-quarter fiscal 2014 results, we are skeptical about the
company's future performance due the disappointing performance at
its wine and spirit segment. The segment's sales improved 3% year
over year but increased promotion and marketing costs dragged its
operating income. Moreover, Constellation Brands expects its wine
and spirit operating income for fiscal 2014 to be in the range of
flat to slightly negative.
Further, we remain apprehensive about the stock's future
performance due to rising grape prices. We noticed that the grape
harvest in 2013 remained weak for the third consecutive year,
resulting in higher grape prices. We believe that the company
might be unable to fully pass on the rising grape costs to
consumers, which may consequently dent its margins. Additionally,
Constellation Brands' highly leveraged balance sheet may limit
its financial flexibility.
Nonetheless, we are impressed with Constellation Brands'
consistent focus on brand building and its initiatives to include
new products in its wine and spirits businesses, which are the
key revenue drivers for the stock.
Moreover, this Zacks Rank #1 (Strong Buy) has aggressively
increased its beer business in the last one year by acquiring
Crown Imports business and Grupo Modelo SAB de C.V.'s U.S. beer
business from Anheuser-Busch InBev. Last quarter, the segment
contributed nearly 46% to the total revenue.
Furthermore, we believe that Constellation Brands with its
formidable portfolio of well-known brands, new product offerings
and strategic initiatives to strengthen its foothold in the U.S.,
holds a promising future. Moreover, the company is enhancing its
points of distribution at retail and is executing its strategic
merchandising initiatives well, which will help augment
Other Stocks Worth Considering
Other stocks in the consumer staples sector worth considering
Green Mountain Coffee Roasters Inc
The Hain celestial Group, Inc.
ConAgra Foods Inc.
). All these carry a Zacks Rank #2 (Buy).
CONAGRA FOODS (CAG): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
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CONSTELLATN BRD (STZ): Free Stock Analysis
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