“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, October 01, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"

Option Trade – Constellation Brands, Inc. Class A (NYSE: STZ) Calls

Monday, October 01, 2018

** OPTION TRADE: Buy the STZ JAN 18 2019 235.000 CALL at approximately $3.50. Place a pre-determined sell at $7.00.

Also include a protective stop loss of $1.40.

The beer and spirits specialist, Constellation Brands, Inc. Class A (NYSE: STZ), will report earnings before the market opens. The consensus earnings estimate is $2.58 per share on revenue of $2.24 billion; but the Whisper number is for $2.61 per share. Consensus estimates are for year-over-year earnings growth of 4.45% with revenue decreasing by 2.49%.

Earnings have been rising, and are expected to rise 7.8% during the current year, and an additional 10.6% next year.

Constellation Brands has been trending higher in the four weeks leading up to its earnings report and the stock could build on its recent gains if the company tops estimates as expected.

In the past four quarters, Constellation has beaten expectations three times and missed only once - which was the most recent quarter.

The beer and spirits specialist has done an exceptional job of putting together a strong portfolio of much-loved products, including the well-known beers Corona and Modelo. In an era in which many beer drinkers are moving beyond the most popular domestic names in the industry, Constellation has positioned Corona in particular as distinctive from other brands.

Constellation is also making major moves to expand. Craft beer has been a key growth area within the broader category, and Constellation's purchase of Four Corners Brewing opens the door to potential new products in the future.

At the same time, Constellation's $3.8 billion investment in Canopy Growth (NYSE: CGC) has been ground-breaking, and it gives Constellation the right to take a controlling interest in the marijuana stock in the future. With all the attention that cannabis products are getting in light of the coming legalization of recreational marijuana in Canada, Constellation has grabbed a first-mover advantage among major consumer companies in what could eventually become a huge high-growth opportunity in the U.S. as well.

But, this has caused a problem as Constellation didn’t buy Canopy outright, it just has a majority stake in the company (if all warrants are exercised, that is); which caused an initial backlash from STZ investors which was severe. Roughly $2.5 billion was wiped from Constellation’s market capitalization following the news as investors worried that the company overpaid. This is the current perception among many STZ investors, and a considerable underlying current in the stock’s sentiment backdrop.

However, this has now provided a great opportunity for this options trade as the stock price has become more reasonable as an entry price.

The situation is these views are very short sighted. Medical marijuana is now legal or decriminalized in roughly 50 countries and 31 U.S. states. And recreational marijuana is quickly following suit.

Analysts at Benchmark recently projected that the global cannabis would hit $200 billion over the next 15 years. What’s more, Canopy Growth is positioned to take full advantage of that massive market, and is likely among the best cannabis plays on the market.

That’s the long view, and Constellation is smart to get in on this market early.

Analysts Opinions

Constellation Brands was upgraded by Zacks Investment Research from a “sell” rating to a “hold” rating in a research report issued on Thursday, September 20th.

According to Zacks, “Constellation Brands outperformed the industry in the past month, driven by its solid top-line trends. In first-quarter fiscal 2019, results reflected the 9th sales beat in last 11 quarters. Top-line beat was driven by strong depletions in the beer business, offset by softness in wine & spirits. Looking ahead, the company raised GAAP earnings view for the fiscal. Further, management continues to expect high-single digit volume growth, and issued robust guidance for the beer segment in fiscal 2019. However, its earnings missed estimates in the first quarter driven by higher marketing expenses and transportation costs that led to a decline in the operating margin. This marked an earnings miss after 14 consecutive beats. Further, the market remains concerned about the outcome of its recent $5 billion investment to expand stake in Canada’s Canopy Growth. Nevertheless, estimates have been stable lately.”

Also, Evercore ISI set a $255.00 target price on Constellation Brands in a research note released on Friday, September 21st. The brokerage currently has a buy rating on the stock.

Several other equities analysts have recently commented on the company…..

  • ValuEngine upgraded Constellation Brands, Inc. Class A from a “hold” rating to a “buy” rating in a research report on Thursday, June 28th.
  • SunTrust Banks lowered Constellation Brands, Inc. Class A from a “buy” rating to a “hold” rating and dropped their price target for the stock from $260.00 to $220.00 in a research report on Monday, September 10th.
  • Morgan Stanley dropped their price target on Constellation Brands, Inc. Class A from $262.00 to $258.00 and set a “buy” rating for the company in a research report on Tuesday, July 3rd.
  • Finally, Bank of America dropped their price target on Constellation Brands, Inc. Class A from $250.00 to $230.00 and set a “buy” rating for the company in a research report on Thursday, August 16th.

Two equities research analysts have rated the stock with a sell rating, six have assigned a hold rating, eighteen have issued a buy rating and one has given a strong buy rating to the company’s stock. The stock presently has an average rating of “Buy” and an average target price of $242.88.

Summary

STZ stock opened at $215.62 on Friday. The firm has a market cap of $41.23 billion, a PE ratio of 25.16, a price-to-earnings-growth ratio of 2.13 and a beta of 0.03. Constellation Brands, Inc. Class A has a 52-week low of $198.44 and a 52-week high of $236.62. The company has a quick ratio of 0.77, a current ratio of 1.81 and a debt-to-equity ratio of 0.89.