We remain bullish on Constellation Brands despite a top-line miss last quarter
Constellation Brands (STZ), the maker or Corona beer and other alcoholic drinks, reported mixed quarterly results on Tuesday. But strong guidance from management indicates the company is in good shape for the current quarter and beyond. Net sales fell 5% year over year, to $1.998 billion, missing Wall Street's expectations of $2.016 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share tumbled 16.5% from a year ago, to $1.98 a share, but exceeded consensus of $1.82 per share. Excluding equity losses from Constellation's stake in cannabis company Canopy, adjusted earnings came in at $2.15 per share. In addition to the headline numbers, adjusted operating income of $592 million was down 10% year over year, but above the $566 million consensus estimate, according to FactSet. Operating cash flow came in at $476 million, a bit short of the $521 million estimate, while free cash flow of $125 million came ahead of the $19 million expected outflow. Bottom line Despite the top-line miss, we like what we're seeing this current quarter, which includes Cinco de Mayo, a big day for beer sales. Backing this view is better-than-expected depletion results — alcohol industry's version of same store sales — in beer, which accelerated sequentially. This is a factor we believe investors are keying in on as shares pushed higher in Thursday's session. We also appreciate the 2022 divestiture of certain (primarily mainstream) wine and spirits brands, a move that has resulted in a more premium portfolio. We like the focus on premium because as we saw this quarter, mainstream brands struggled due to challenging market conditions, while the premium brands managed to outperform the broader market. Going forward, management intends to continue shifting the mix of Constellation's wine-and-spirits portfolio toward the higher end of the market. This shift and a continued focus on enhancing productivity should result in margin expansion. Looking ahead, management provided a better-than-expected earnings forecast for fiscal year 2024 and reaffirmed its disciplined approach to capital allocation. This will provide the means to continue investments in beer production capacity and product innovation, while also working down net leverage, supporting the company's dividend, repurchasing shares and opportunistically doing smaller acquisitions. Given the positive momentum and management's proven ability to manage through this inflationary environment, we reiterate our 1 rating and $260 price target. Beer operating margin contracted as higher prices were more than offset by higher packaging, raw materials, logistics and other costs. Beer shipments to distributors were down 5.4% annually, but it was a smaller decline than the 6.6% contraction expected. On a full-year basis, the beer segment put up its 13th consecutive year of shipment growth. Beer depletions , which represent U.S. domestic distributor shipments to retail customers, were up 6.3%, better than the 3.8% expected on the Street thanks to the strength of Modelo Especial and Corona Extra brands. Wine-and-spirits shipments were down 22.1% annually (-18.9% after adjusting for volumes associated with the 2022 wine divestiture), while depletions declined 4.9%. Guidance Management anticipates consolidated adjusted earnings of $11.70 per share to $12.00 per share for the full fiscal year 2024, excluding Canopy. That's ahead of analyst forecasts of $11.68 per share. Assumed in this guidance are beer sales growth of 7% to 9% and operating income growth of 5% to 7%, implying a roughly 38% full-year operating margin. The wine-and-spirits portfolio is expected to see organic net sales come in somewhere between a 0.5% decline and 0.5% increase while operating income is expected to increase between 2% and 4%, implying about 40 basis points of operating margin expansion. Additionally, operating cash flow is expected to come in between $2.4 billion and $2.6 billion, below the 3.06 billion expected coming into the quarter. Taking out capital expenditures of $1.2 billion to $1.3 billion, the free-cash-flow forecast comes in between $1.2 billion and $1.3 billion, also a bit short versus the $1.4 billion expected coming into the print. (Jim Cramer's Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico. Susana Gonzalez | Bloomberg | Getty Images