**Option Trade – Constellation Brands, Inc. (NYSE:STZ) Calls Monday, October 02, 2017
Also include a protective stop loss of $2.10.
Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!
by Ian Harvey
The times of Prohibition are gone and sales of alcohol are consistently strong and growing. In 2016 alone, supplier sales of premium spirits were up 4.5% to $25.2 billion.
Arguably, the strongest option currently is Constellation Brands, Inc. (NYSE:STZ), based out of Victor, NY. STZ has grown over time to the world's largest wine distributor as well as the U.S.’s third-largest beer brewer (following AB InBev (NYSE:BUD) and SABMiller (OTCPK:SBMRY)).
Their portfolio of household-named beers includes Modelo Especial (U.S. business only - a purchase from AB InBev after a Justice Department injunction) and craft beer darling, Ballast Point (a $1 billion acquisition back in 2015). They also own premium spirits such as Paul Masson Grande Amber Brandy and Black Velvet Canadian Whiskey.
Constellation Brands, a producer and marketer of beer, wine and spirits with operations in the United States, Canada, Mexico, New Zealand and Italy, is scheduled to report its next quarterly earnings report on Thursday, October 5, before the markets open. Constellation Brands EPS is expected to climb 22% to $2.16 when fiscal Q2 results come out but the Earnings Whisper number is $2.21 per share. Analysts see the beer, wine and liquor company's sales rising 1.8% to $2.06 billion.
On average, analysts expect that Constellation Brands will report full year earnings of $8.15 per share for the current financial year, with EPS estimates ranging from $8.07 to $8.30. For the next fiscal year, analysts expect that the company will report earnings of $9.14 per share, with EPS estimates ranging from $9.00 to $9.29.
Craft beer and liquor sales have been on the rise recently as Budweiser and Miller sales fall flat with millennials. The global craft-spirits market is seen growing at a compound annual growth rate of 26.91% from 2017 to 2021, according to a study by market research firm Technavio. Shares are just shy of re-entering buying territory after initially breaking out in August.
Constellation Brands has a market cap of $38.95 billion, a PE ratio of 25.02 and a beta of 0.03. The stock has a 50 day moving average price of $198.80 and a 200-day moving average price of $183.32. Constellation Brands Inc has a 52-week low of $144.00 and a 52-week high of $205.12.
STZ's market cap has incrementally risen to $39.48 billion with a forward P/E ratio of 25.33, sitting just above the Alcoholic Beverage sector average of 23.27 but below the S&P 500 average of 25.51. Revenue has grown to $7.4 billion, and both the top and bottom lines remain positive for quarterly growth. Quarterly earnings growth YoY come in at 26.5% and, of note, in the previous four quarters, STZ has an average positive earnings beat of 11.7%.
The company's consistent focus on brand building and its initiatives to include new products are the key revenue drivers. In this regard, Constellation Brands is witnessing increasing market share, especially in the U.S. beer category and was the highest growth contributor in the same category for the fourth straight year, in fiscal 2017.
Additionally, the company is focused on expanding in the craft beer space that has become a solid growth avenue in the beer space. Going forward, management also expects impressive results from its Ballast Point craft beer brand, which is currently placed among the top 20 craft brands nationwide.
Meanwhile, Constellation Brands is expanding operations via acquisitions directed toward achieving business growth and remains on track with its glass plant expansion.
There has been the acquisition of several Mexican beer brands, which means that this deal-making has been immediately accretive to revenue and earnings. The company is constructing some of the largest brewing facilities in the world to supply an unquenchable thirst for premium Mexican beers that is driving operating margins much higher.
A recent trend analysis reveals that the craft beer segment has almost matured and spirits lovers are now looking for the craft essence in spirits. Therefore, there has been a rise of craft distilleries in the industry and Constellation Brands is looking to explore the craft spirits segment. Evidently, the company acquired and integrated High West Distillery, Charles Smith Wines and The Prisoner Wine Company brands, which marked its entry in the premium craft whiskey space. Also, the company has made small investments in Catoctin Creek Distilling Company and Bardstown Bourbon Company.
Constellation Brands is well-positioned to gain from these ongoing industry trends.
Earlier this month at the Barclays Back-to-School Consumer Conference, Constellation Brands management updated investors on the company's prospects. According to industry data cited by the company, the total U.S. beverage alcohol category grew 3% versus the rest of the consumer packaged goods industry, which only grew 1%. Only bottled water (8%) grew faster than alcohol. Interestingly, cigarettes grew 2%.
Constellation Brands believes "premiumization" drives growth. In the beer category, the high end grew 7% while the rest of the category grew just 2%. Premium wine grew 7% versus 4% for the lower-quality brands. And again, in spirits, the high end of the business grew 8% while the rest of the category was up only 5%. The 10-year average growth rate for high-end beer jumped 5% and craft beer rose 10%, while the total beer category has been flat. And in the last three years, craft beer has surged ahead by 13% while the total beer category grew just 1%.
Americans love to drink. According to Constellation Brands, 55% of all drinkers drink across all three categories -- beer, wine and spirits -- and spend an average of $454 a year to keep their fridges stocked and their liquor cabinets filled.
Analysts and Hedge Funds Opinions
Morgan Stanley increased their target price on shares of Constellation Brands from $204.00 to $218.00 and gave the stock an “overweight” rating in a research report on Monday, July 3rd.
Several other analysts have also recently commented on the company…..
One equities research analyst has rated the stock with a sell rating, six have assigned a hold rating, eleven have assigned a buy rating and one has issued a strong buy rating to the company’s stock. The company presently has an average rating of “Buy” and an average target price of $218.
Several institutional investors have recently made changes to their positions in the stock, to name a few….
Harvey’s Options Volatility Indicator
Constellation Brands can continue to trade higher as the company is perfectly positioned to capture the high-end drinker as well as the shifting demographics in the United States.
Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..
** OPTION TRADE: Buy the STZ OCT 20 2017 200.000 CALL at approximately $5.30. Place a pre-determined sell at $10.60.
Also include a protective stop loss of $2.10.
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