“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, November 12, 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

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"Trading Capital Management"



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

Monday November 12, 2018

** OPTION TRADE: Buy the STZ JAN 18 2019 210.000 CALL at approximately $6.00. Place a pre-determined sell at $12.00.

Also include a protective stop loss of $2.40.

The beer and spirits specialist, Constellation Brands, Inc. Class A (NYSE: STZ), reported an excellent quarter on October 01, 2018; and members scored 100% profit. STZ had powerful growth resulting in EPS soaring 15.6% from Q2 with sales up over 10%. And STZ has continued its upward trajectory.

The core business is growing faster than anyone believed, and the Canopy Growth investment is very likely a masterstroke,” said Pivotal Research’s Timothy Ramey.      

The company has recently announced a massive $4 billion investment in Canada’s Canopy Growth for a 38% stake (up from 9.9% previously) — our “exclusive global cannabis partner,” according to Constellation Brands CEO Rob Sands.

We are convinced that CGC is the best way to play the rapidly growing Cannabis market and investors should begin to fully reflect that value and CGC’s prospects, rather than penalizing STZ for the cash carrying costs of the investment” said Ramey.

About STZ…..

Constellation Brands, Inc, together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company sells wine across various categories, including table wine, sparkling wine, and dessert wine. It provides beer primarily under the Corona Extra, Corona Light, Modelo Especial, Modelo Negra, Modelo Chelada, Pacifico, and Victoria brands, as well as Funky Buddha, Obregon Brewery, and Ballast Point brands.

Past Performance…..

Constellation Brands last announced its earnings results on Thursday, October 4th. The company reported $2.87 earnings per share (EPS) for the quarter, beating the consensus estimate of $2.60 by $0.27.

The business had revenue of $2.30 billion for the quarter, compared to analysts’ expectations of $2.25 billion. Constellation Brands had a return on equity of 18.63% and a net margin of 38.18%. The business’s revenue for the quarter was up 10.1% on a year-over-year basis. During the same quarter last year, the firm earned $2.47 EPS. Equities analysts anticipate that Constellation Brands will post 9.43 earnings per share for the current year.

Future Earnings…..

STZ’s next earnings release is expected to be January 4, 2019. In that report, analysts expect STZ to post earnings of $2.06 per share. This would mark year-over-year growth of 3%. Meanwhile, the Consensus Estimate for revenue is projecting net sales of $1.91 billion, up 6.28% from the year-ago period.

Influencing Factors…..

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 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.

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.

Also, Constellation trades at 22x our estimate of FY20 EPS and 17.3x FY18 EV/EBITDA — no doubt as cheap as STZ has been in the past five years. If looking at Ramey’s $300 price target, this suggests 50% upside from current levels!

Analysts Opinions

Constellation Brands has been assigned a $259.00 price objective by research analysts at Morgan Stanley in a note issued to investors on Tuesday, October 16th. The brokerage currently has a “buy” rating on the stock. Morgan Stanley’s target price would indicate a potential upside of 27.50% from the stock’s current price.

As well, Jefferies Financial Group restated their buy rating on shares of Constellation Brands in a research report released on Wednesday, October 17th. Jefferies Financial Group currently has a $289.00 price target on the stock.

In a release after mkt, STZ announced Rob Sands will step aside on 3/1, ending his 11-year tenure as CEO, and will assume the role of exec. chairman. STZ’s current pres./COO, Bill Newlands, will assume the CEO role. While likely a bit earlier than the market anticipated, Newlands appeared to be the clear successor to Mr. Sands when he was named Pres. earlier this year. STZ remains our top large cap growth idea w/base biz (ex-Canopy) trading at ~16x EV/ EBITDA.”,” Jefferies Financial Group’s analyst commented.

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

  • Bank of America raised their price objective on Constellation Brands from $235.00 to $240.00 and gave the stock a buy rating in a research report on Friday, October 5th.
  • Morgan Stanley lowered their price objective on Constellation Brands from $258.00 to $251.00 and set a buy rating for the company in a research report on Thursday, September 27th.
  • Evercore ISI set a $255.00 price objective on Constellation Brands and gave the stock a buy rating in a research report on Friday, September 21st.
  • Finally, JPMorgan Chase & Co. reissued an overweight rating on shares of Constellation Brands in a research report on Friday, September 28th.

Two research analysts have rated the stock with a sell rating, seven have assigned a hold rating, seventeen have given a buy rating and one has given a strong buy rating to the company. Constellation Brands presently has a consensus rating of Buy and an average price target of $246.96.

Summary

STZ has a market capitalization of $38.79 billion, a P/E ratio of 23.29, a PEG ratio of 1.98 and a beta of 0.08. Constellation Brands has a 1 year low of $196.26 and a 1 year high of $236.62. The company has a quick ratio of 0.76, a current ratio of 1.66 and a debt-to-equity ratio of 0.80.