Constellation Brands, Inc.

STZ Details

Decent EPS Growth in FY21: Constellation Brands, Inc. (NYSE: STZ) is a leading beverage alcohol company with operations in the U.S., Mexico, New Zealand, and Italy. Despite COVID-19 related headwinds, the company reported record operating and free cash flow of $2.8 billion and $1.9 billion, respectively, in FY21 (year ending 28 February 2021). Further, the company reported basic EPS of $10.23 in FY21, higher than the EPS of $9.97 in FY20. The company reported net sales of $8.6 billion for FY21, up by 3% on FY20. Over the year, the company’s Beer business delivered decent shipment and depletion volume growth. The company also reduced its debt by $1.7 billion during FY21. As at 28 February 2021, the company had cash and cash equivalents $460.6 million, up from $81.4 million as at 29 February 2020.  

FY21 and Q4FY21 Results (Source: Company Reports)

Quarterly Dividend Declared: For Q4FY21, the company has declared a cash dividend of $0.76 per share Class A and $0.69 per share Class B common stock. The dividend has a record date of 4 May 2021, and payment date of 18 May 2021.

Key Risk: COVID-19 pandemic could result in the closure of non-essential businesses, which may include the company’s manufacturing facilities and other associated governmental containment actions. Further, the company is also exposed to the risks related to the changes in general economic, geo-political, domestic, international, and regulatory conditions and instability in world financial markets.

Outlook: For FY22, the company expects its operating cash flow to be in the range of $2.4 - $2.6 billion. FY22 free cash flow is expected to be between $1.4 - $1.5 billion. The reported EPS for FY22 is expected to be in the range of $6.90 - $7.20, lower than the actual FY21 EPS of $10.23.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has provided a return of 20.01%. The stock is currently inclined towards its 52-weeks’ high level of $244.75. On the technical analysis front, the stock has a support level of $225.80 and resistance of $244.7. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in % terms). We believe that the company can trade at some discount to its peer average P/E Median (NTM trading multiple), considering the risks associated with the COVID-19 pandemic, high cash cycle, and expected decline in FY22 EPS compared to FY21. For the purpose, we have taken peers like Boston Beer Company Inc (NYSE: SAM), Molson Coors Beverage Co. (NYSE: TAP), Anheuser Busch Inbev SA (NYSE: BUD), etc. Considering the rise in reported net sales and operating income in FY21, recently declared quarterly cash dividend, decent performance by Beer business, reduction in debt and increasing cash balance, we give a “Hold” rating on the stock at the closing price of $240.92, down by ~0.29% as on 7 May 2021.

STZ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Altria Group, Inc.

MO Details

Q1FY21 Result Highlights: Altria Group, Inc. (MYSE: MO) is a producer of tobacco, cigarettes, and related products. It has a leading portfolio of tobacco products for U.S. tobacco consumers. The company’s wholly-owned subsidiaries include - Philip Morris USA Inc. (PM USA), U.S. Smokeless Tobacco Company LLC (USSTC) and John Middleton Co. (Middleton). For Q1FY21, the company reported net revenue of $6,036 million, down by 5.1% on the previous corresponding period (pcp). The company reported net earnings of $1,421 million in Q1FY21. During the quarter, the company made decent progress in advancing its non-combustible portfolio and its tobacco businesses also performed well over the period. Over the quarter, the company repurchased 6.9 million shares at an average price of $47.02, for a total cost of $325 million. As at 31 March 2021, the company had cash and cash equivalent of $5,792 million.

Q1FY21 Results (Source: Company Reports)

Key Risks: The company is exposed to the risks related to the availability or quality of tobacco, other raw materials, or component parts. Further, it is exposed to the risks related to unfavorable litigation outcomes. The company’s Ste. Michelle’s wine business is exposed to the risks related to unfavorable changes in grape supply, and changes in adult consumer preferences.

Outlook: For FY21, the company expects its adjusted diluted EPS to be in a range of $4.49 to $4.62, representing a growth of 3% to 6% on FY20. In FY21, the full-year adjusted effective tax rate is expected to be between 24.5% to 25.5%. The company is planning to conduct its 2021 Annual Meeting of Shareholders on 20 May 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has provided a return of ~17.61% and the in the last six months it has provided a return of ~34.02%. The stock is currently inclined towards its 52-weeks’ high level of $52.59. On the technical analysis front, the stock has a support level of $47.43 and resistance of ~$52.56. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of lower single digit (in % terms). We believe that the company can trade at a slight discount compared to its peer median EV/Sales (NTM trading multiple, considering the decline in Q1FY21 net revenue and net earnings, and key risks associated with the business. We have taken peers like Philip Morris International Inc (NYSE: PM), Vector Group Ltd (NYSE: VGR), Turning Point Brands Inc (NYSE: TBP), etc. Considering the stock’s decent returns in the last three- and six-months period, current trading level and valuation, we are of the view that most of the positive factors have been discounted at the current juncture. Hence, we give an “Expensive” rating on the stock at the closing price of $49.95, up by ~0.93% as on 7 May 2021. 

MO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.