Constellation Brands Could See Full Recovery To Pre-Covid Level

by Trefis Team
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We believe there may be a decent opportunity with Constellation Brands stock (NYSE: STZ) at the present time. STZ trades at $182 currently and is in fact down 3% so far this year. It traded at a pre-Covid high of $205 in February, and it is still 11% below that level now. STZ stock has gained around 74% from the low of $105 seen in March 2020, more than the S&P 500 which is up 45%. STZ stock has outperformed the market following the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. That said, with the lifting of lockdowns gradually, the spirit demand in the traditional restaurants and pubs category is also expected to pick up in the coming months. This is likely to provide an uptick to the stock. In view of its rally since March and projections of a better top and bottom line in FY 2022 (year ending February 2022), STZ stock is likely to see a full recovery to pre-Covid levels in the near term, reflecting potential gains of close to 15%. Our conclusion is based on our detailed analysis of Constellation Brands stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 45% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how STZ and the broader market performed during the 2007-08 crisis.

Timeline for 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

STZ vs S&P 500 Performance Over 2007-08 Financial Crisis

STZ stock declined from levels of around $23 in September 2007 (pre-crisis peak) to levels of around $12 in March 2009 (as the markets bottomed out), implying STZ stock lost 48% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $15 in early 2010, rising by 22% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

STZ Fundamentals Over Recent Years Have Been Strong

STZ revenues grew from $7.3 billion in FY2017 to $8.3 billion in FY2020, due to beer volume growth and rising prices. Along with higher revenues, margins improved over recent years with EPS increasing from $7.76 in FY2017 to $18.24 in FY2019. However, earnings turned negative (-$0.07) in FY2020 due to large impairment charges and loss from equity affiliates. STZ’s Q1 2021 (ending May 2020) revenues saw a 6.6% y-o-y decline. Earnings came in at -$0.94/share as against -$1.30/share in the year-ago period.

Does STZ Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

STZ’s total debt increased from $9.2 billion in FY2017 to $11.6 billion at the end of Q2 2020, while its total cash increased marginally from $0.2 billion to $0.3 billion over the same period. The company also generated $0.7 billion in cash from its operations in the first three months of FY2021. The company’s balance sheet could prove to be the only impediment/risk in its ability to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. As investors focus their attention on expected 2021 results (FY2022 numbers in case of STZ i.e. for the year ending in February 2022), we believe Constellation Brands stock has the potential for some gains once fears surrounding the Covid outbreak are put to rest. The stock is likely to rise to its pre-Covid level of over $205 in the near term. That said, high debt burden along with a modest cash position remains a risk factor to the realization of these gains.

For a better picture of the alcoholic beverage space, dive into our comparative analysis of Anheuser-Busch vs Diageo. Also, Compare Molson Coors with Anheuser-Busch InBev and you see that TAP is a better bet right now

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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