Now is the winter of big beer made glorious summer by Constellation Brands

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Julian Close 01/13/2014

If you last looked at the beer and wine industry a few years ago, you may be surprised by how much has changed. Most notably, a wave of mergers and acquisitions has produced a behemoth, Anheuser Busch InBev ( BUD ) that dominates the market in Europe, the U.S. and Latin America. The creation of such a monster has required a few concessions, such as when AB InBev wanted to acquire Modelo, and U.S. regulators insisted that some of Modelo's brands and one of its breweries first be sold.

In stepped Constellation Brands ( STZ ), a distributer of wine, beer and one Canadian whisky. Constellation bought the Modelo assets for $4.8 billion, which now appears to have been a fire-sale price. The new assets are already contributing to Constellation's bottom line as part of their Crown Imports division, and their growth in 2013 has been impressive. Corona, the flagship brand, is the best-selling imported beer in the United States.

On Wednesday, January 8, Constellation Brands reported the results of its 2014 fiscal third quarter. The company earned $1.10 per share, blowing away the consensus estimate of $0.90. Among the reasons for the earnings surprise were both a general rise in alcohol consumption and a double-digit rise in sales from Crown Imports, with Corona leading the way. It would seem that investors should expect to see alcohol-related stocks doing well this earnings season.

Americans are drinking less beer these days in relation to wine, and American taste in beer is changing. This has led to a shift away from many of the giants of the past and toward craft beer, though the later term is without any fixed definition. Industry upstart Boston Beer ( SAM ) grew at a fantastic 29% in 2013, though with the company's current market cap of nearly $3 billion, one wonders if its flagship Samuel Adams brand is really a craft beer at all anymore.

Corona, obviously does not meet any definition of craft beer, and yet Americans are buying it as if that is what it were. The exact reasons for this are unclear, but it may be sense of authenticity-unlike AB InBev, Constellation has not produced fake craft beers, and that has been wise, since the tactic doesn't work very well. Corona, generally served with a slice of lemon or lime, is light, but it manages to avoid the much deserved stigma of "light beer," which consumers have been finding they have less and less of a taste for in recent years. It may be that publicity surrounding AB InBev's Modelo acquisition has given Corona a sort of "last man standing" appeal, even though the AB InBev juggernaut still faces competition from Miller Brewing Company and Molson Coors as well.

Whatever the reason, most of the dinosaur beers from two or three decades back appear to be in their autumn years, but it is a glorious summer day for Corona, and Constellation Brands is betting heavily on the future of the franchise. If you haven't already, get ready to start seeing Corona on tap at bars and restaurants across America; Constellation brands is going to see exactly how far it can push this "Corona as craft beer" thing.

At its recent price of $80.00, STZ stock has an oddly low P/E ratio of 8.51, and its 2014 profits, it is now estimated, will be more than 50% greater than its 2013 profits.


Chart courtesy of stockcharts.com

We seek to capitalize on the high demand Constellation Brands is currently seeing for its products with a bull-put credit spread. Look at the April 67.5/70 bull-put spread for at least a $0.25 credit. Use limit orders. This trade has a target return of 11.1% over 96 days. The stock has to fall 12.5% to cause a problem. This is an aggressive trade, best suited to investors with diverse portfolios and a 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: BUD , SAM , STZ

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