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It may be time to toast Constellation Brands

Remembering Black Monday

Investors haven't tired yet of celebrating each time the stock market again climbs to an all-time high -- as it did once more on Friday. Indeed, the Dow Jones Industrials, S&P 500 and Nasdaq indexes have all been on a tear, which is truly sensational news. But at the same time, it's a source of distress and anxiety to many who worry that the market is destined to plunge deeply sometime soon.

The memory of the 30th anniversary of Black Monday's tumble of more than 20 percent last Thursday, Oct. 19, only exacerbated that menacing fear. And yet, US stocks continue to ratchet higher almost daily, with the Dow closing on Friday at 23,329, the S&P 500 at 2,575 and the Nasdaq at 6,629 -- all new record highs.

It's no longer a question of why, but a more urgent issue of how much more can it go on? 

"Unlike 30 years ago, however, when the market had already recorded a more than a 16 percent decline from its prior peak, the three major indexes are all at new highs, and the FOMO (fear of missing out) mindset has yet to shift into high gear," said Sam Stovall, chief equity investment strategist at CFRA Research.  

What's behind the recent stock market surge?

So for people still out of the market, some analysts believe it's not yet too late to catch this express train. What's needed at this point, however, is stock-picking prowess because many of the experienced players still see a broad panoply of stocks that they believe continue to be underpriced -- and attractively positioned to go higher.

Enter Constellation Brands (STZ), a company closest associated with celebrations and merriment as the country's largest marketer of beer, wine and spirits. Its stock has climbed to $211 a share from a 52-week low of $144. Some of the Constellation bulls see the stock price adding about $100 a share in a year, to as high as $243.

"We see strong consumer demand for the company's imported and craft beer products as Constellation boosts marketing spending, which we see leading to increased distribution," said Joseph Agnese, equity analyst at CFRA, who recommends the stock as a "strong buy." He has a 12-month price target of $242 a share.

Among Constellation's key brands are Corona and Modelo in beer; Robert Mondavi, Black Box and Arbor Mist in wine; and SVEDKA and Black Velvet in distilled spirits.

Agnese sees the company's premium wine and spirits businesses "favorably positioned in the alcoholic beverages industry," as Constellation sells 18 of the top 100-selling table wine brands. The share gains in its products are supported by demographics as millennials and baby boomers generally prefer wine and spirits over beer and by the overall "premiumization" trend in the alcoholic beverage industry. 

The analyst also sees long-term earnings-per-share benefiting as Constellation increases its focus on and expansion of production capacity through acquisitions in its premium wine and spirit businesses and in its craft beer category. Among its recent acquisitions were the Prisoner Wine in April 2016 for $285 million, with estimated annual sales of $85 million, and wine producer Charles Smith and whisky producer High West both in October 2016.

Bread to beer, and back again

In the beer craft beer business, Constellation acquired Funky Buddha Brewery in August 2017, thus increasing its operations in the fast-growing craft beer segment. In wines, the company is seen benefiting from the launch of new varietal line extensions and new brands, such as Ravage, 7 Moons and Cooper & Thief.

 "We see beer growth being supplemented by 6 percent organic sales growth in wine and spirits," Agnese pointed out.  

One impressive number in Constellation's business is its gross margin, which is expected to grow to 49.8 percent in 2018, up from last year's 47.9 percent, as improved sales and more favorable product mix more than offset increases in marketing to support new products. "Longer term, we expect gross margins to continue to widen as 100 percent of Constellation's beer production is moved to its brewery in Mexico, which is currently undergoing an expansion," said Agnese.

Andrea Teixeira, analyst at JPMorgan Securities, who rates Constellation as "overweight," noted that with the earnings estimates for fiscal 2018 moving higher and "business momentum still moving in the right direction, we think shares of Constellation can continue to outperform through the balance of the year and into 2018, despite being up about 36 percent year-to-date." 

So she has raised her price target for the stock to $237 a share, up from $220. And the analyst also increased her earnings estimates for 2018 to $8.44 a share from $8.10, vs. 2017's $6.76. For 2019, she projects earnings of $9 a share.

"Constellation is one of the fastest growing large-cap beverage companies in the US, thanks to its diversified portfolio across beer, wine and spirits," said Teixeira. She believes the company's long-term revenue growth targets for its beer and wine and spirits segments are more than achievable. She rates the stock as "outperform."

How will wildfire damage to California vineyards impact industry?

The wildfires in Northern California had been a concern, noted Vivien Azer, analyst at investment firm Cowen, but she said she has been encouraged by reports late last week that Constellation's vineyards "had not incurred significant damage." Notably, 75 percent of Constellation's wine production in the US is located in three locations: Canandaigua, New York;  Acampo, California; and Madera, California, which is nearly 200 miles southeast of Napa.

Azer rates Constellation as "outperform," with a price target of $243 a share, in part based on the company's "outsized exposure to imported beer," a category that she expects will continue to take market share from domestic brews. And the analyst also has high expectations for Constellation's wine business which, she says, continues to improve.

If these analysts are right, that would be something to drink to.