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Years ago, at the time of the auction market model, I spent some time in the crowd of Constellation Brands (STZ). Nobody called this company by its corporate name at the time. You've heard a lot of famous nicknames that have gone from the shopping community to the general public … "Burgers" for McDonald's (MCD) immediately comes to mind, "Hot Shoppes" for the former Marriott Corp. , "Green Beanie" for the old Burlington North Railway. The Constellation was then trading around $ 20 and attracting little attention. The constellation was simply called Starz, or a slow day "Star Child". No idea where this one comes from … but I heard it.
Earnings
This morning, the firm went on the band with their Q2 numbers. They have not only exceeded earnings forecasts, they have also reached the consensus of 27 cents. Revenues grew 10% from one year to the next, which is solid. It was not just the beats though. It was the guidance. Constellation expects operating cash flow of $ 2.35 to $ 2.55 billion for the fiscal year. This would represent an increase of $ 2.05 billion over 12 months. Free cash flow is now expected to be between $ 1.2 billion and $ 1.3 billion. What does it do? The company now looks forward to an annual EPS of $ 9.60 to $ 9.75. The consensus had been as low as $ 9.30 until recently, although it became clear that expectations would have to be revised upwards.
Business
When everyone hears about Constellation Brands these days. they automatically think of the company's $ 4 billion investment in Canopy Growth (CGC), which places it in the middle of the latest growth, namely legal beverages and infusions of cannabis and CBD. This is not, however, what brought the day to the second quarter. The volume of beer shipments, led by the Corona and Modelo brands, increased by an impressive 8.7%. This volume, in turn, worked with an operating margin of 41.3%. Dang. A new record.
The negative? The increase in sales and operating profit of the company is no doubt, but it still plays with a ton of debt. The vast majority of this debt is long-term compared to moderate cash. They will have to face this debt. The company uses a cash flow ratio that suggests that paying bills is not a problem, but that this activity requires building and storing large amounts of inventory, which squeezes a company's fast ratio. .
Bottom line
The company manages its core business extremely well and its future is visibly somewhat visionary. I have no problem blessing an investment in this name (but not at these prices) with the appropriate measures taken in terms of risk management.
You can see here that the name failed at this level in early August. Even if the pop of today has clearly broken the level, this one must prove itself, which it has not done yet.
Here is what I think a trader can do:
1) A trader can wait until the euphoric response to these gains cools. $ 212 looks like a favorable entry point.
2) If a trader feels the need to buy shares today, consider this trade (in minimum lots):
-Buy 100 shares of STZ (last: 220.51 $)
-Sell (write) a $ 230 purchase option at the STZ in January: ($ 5.70 last)
This transaction will have the net effect of reducing the operator base to $ 214.81. Now, does not it sound better? … and it's much closer to where I think I want to buy these.
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