Constellation Brands (NYSE:STZ) reports earnings on October 1, 2020. The company is expected to top the stellar report it delivered in the previous quarter. Early reports suggest that Constellation will beat the already lofty expectation for earnings per share of $2.50. Specifically, the whisper number is hinting that Constellation will report earnings per share (EPS) of $2.61 on revenue of $2.2 billion.
And why wouldn’t the company report better earnings? When the company reported earnings at the end of June, the entire adult beverage sector was only beginning to recover from the effects of the nationwide lockdowns. The on-premise segment for companies like Constellation was affected in multiple ways. First, the company lost the vast percentage of its restaurant and bar business. But it also lost the revenue that it received from live sports and other entertainment venues.
Americans Were Drinking During the Pandemic
As it turns out, Americans were drinking a lot during the pandemic. They bought enough quarantine booze to make a nice dent in Constellation’s loss in on-premise sales. Although Constellation does not have as much exposure to the on-premise beverage sector as its competitors, it still saw beer and wine sales in that category tumble 75% and 80% respectively.
However, due to the increase in off-premise sales, Constellation managed to post only a slight loss in revenue at -6%. Its primary competitors such as Anheuser Busch InBev (NYSE:BUD) who some felt would recover strongly were enduring double digit losses.
It’s all about the guidance right now
The known is always better than the unknown. And if we had a crystal ball, we’d all feel better at least knowing when normalcy will return. Constellation certainly would benefit if it could definitively call a bottom. That’s because although it may not be as impacted by the on-premise segment, it’s not unaffected. Restaurants in many major U.S. cities remain closed or operating at severely reduced capacities. And bars are operating on restricted hours.
Major venues are still closed, and it seems like it will be some time before large indoor gatherings are allowed. It hasn’t escaped the market’s attention that Democratic presidential nominee Joe Biden has gone on record to say he would shut down the economy again if that was the advice of his science advisors. That’s not something a prospective investor in Constellation can ignore.
If the company reports solid earnings, STZ stock will likely turn positive for 2020. But as long as the novel coronavirus hangs over the economy, it will be hard to see the stock continuing to grow.
The Company’s Debt Needs to Be Lower
Constellation has seen its total debt rise by 26% to $11.6 billion at the end of June. In that same time, its total cash increased only slightly (from $0.2 billion to $0.3 billion). But the company did generate $0.7 billion in cash in its first fiscal quarter and they were able to satisfy $700 million of debt in the quarter and pay down other near term maturities.
No Dividend Now, But Maybe Soon
Constellation’s four-year run of issuing increasing dividends came to an end this year. That isn’t totally unexpected. Given the uncertain outlook, Constellation is focusing its efforts on maximizing its free cash flow (FCF) in an effort to pay down debt and leverage. The company saw its FCF increase by 24% to $542 million in the first quarter of its fiscal year 2021.
But it’s important to mention that the company only suspended the increase of its dividend. It still paid a dividend to shareholders. And, in fact, the company’s dividend still ranks #14 out of 32 in the Beverages category. And with the way the company is increasing its free cash flow, it’s reasonable to presume that likelihood that it would also seem that Constellation could decide to reissue the dividend rather quickly.
The Best of a Troubled Lot
Personally, this is a segment, I’ll pass on. For me, I want to know the direction of the reopening before I get too excited. However, if you’re inclined to invest in the sector, Constellation looks like the best of the bunch. By focusing on the premium segment, the company should have the ability to maintain its margins. And with Constellation likely to continue to maintain its free cash flow, a high level of debt should become less of a concern.
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