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Why To Keep Avoiding Constellation Brands For Now

Back in early January 2021 I answered Should You Buy Constellation Brands And Its 1.3% Dividend to help you protect your retirement portfolio.

Today, I give an update after it released its latest quarterly earnings and tell you Why To Keep Avoiding Constellation Brands For Now. 

You can read the full article above.

But if you don’t want to; here’s a quick recap of why I said to avoid it previously…

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Constellation Brands (STZ) is the largest alcohol supplier in the United States.  And it also owns 37% of cannabis company Canopy Growth.

It’s based in Victor New York.  It has a $45 billion market cap. And it pays a 1.3% dividend… Which is reason #1 to consider buying its stock.

Constellation Brands 1.3% Dividend

Since 2016 when it began paying a dividend, Constellation’s paid out a total of $10.88 per share in dividends.

At today’s share count of 205 million shares that’s equal to $380.8 million paid out to shareholders in that time.

It also grew its dividend 141% from $1.24 per share in 2016 to $3.00 per share now.  This is an annual dividend growth rate on average of 14.1% per year.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns large profits.  Which is reason #2 to consider buying Constellation Brands stock.

Constellation Earns Large Profits

Over the last decade it earned an average operating income margin of 18.9% per year.  And in 2020 it earned 30.3% operating profit margins.

I look for anything above 10%. 

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 14.8% per year on average.  And in 2020 it earned a FCF/Sales margin of 21.9%.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and potentially valuable.

And Constellation earns far higher margins than my minimum thresholds.

These profits also allow Constellation to have decent debt numbers as well.

Constellation Brands Debt Is Lower Than I Require

As of this writing it has $200 million in cash compared to $11.6 billion in debt.

As a percentage of its balance sheet total liabilities make up 55.3%.

And its debt-to-equity ratio is 0.99.

These are all below my normal thresholds for what I look for in an investment, which adds a margin of safety to potentially investing in Constellation Brands stock.

But what about its valuation?  Is it cheap? 

Constellation IS NOT Cheap

With the markets at or near all-time highs you’d expect a good stock like Constellation Brands to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 39.1.

Its P/CF is 17.8.

Its forward P/E is 21.5.

And its enterprise value to operating income – EV/EBIT is 46.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

Constellation is massively overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

With Constellation’s enormous valuation, this makes it riskier.  Even with the other wonderful things above.

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This thesis to avoid investing in Constellation Brands due to its crazy valuation continued to play out after it released its most up to date quarterly earnings on April 3rd.  Sort of.

  • Fourth quarter 2020 revenue was up 6% to $1.9 billion.
  • Fourth quarter operating income was up 17% to $545 million.
  • In the full year 2020 revenue rose 3% to $8.34 billion.
  • In the full year 2020 operating income fell 11% to $2.16 billion.
  • It reduced debt levels by $1.4 billion in the full year 2020.
  • And it bought back $50 million worth of its stock in 2020.

A bit of a mixed bag here, but overall a great year for the company. Especially considering that for most of the year, bars and restaurants were closed worldwide.

These stellar results led its shares to rise only 3.4% so far this year.

Does that mean its cheap enough to buy yet?

Unfortunately, no.

Its P/E is now 21.9.

Its P/CF is 18.9.

Its forward P/E is 21.8.

And its EV/EBIT is 18.2.

Its far better valued than it was in January due to increased profits and a stagnant share price.

But its still too overvalued to buy right now.

For this reason, I continue recommending that you be patient and wait to buy its stock.

I want an enormous margin of safety for you because this cuts risk AND gives you higher investment returns.

I don’t want you to have just one or the other of these things.  I want you to have both.

And that will still require some patience when it comes to Constellation Brands because it’s still too overvalued to buy.

Remain patient and wait to buy Constellation Brands.

And in the meantime, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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