A first look at Constellation Brands, Diageo, and Brown-Forman; Sea kayaking and hiking in New Zealand

In yesterday's e-mail about New Zealand's wine industry, I mentioned that checking out the main wine-producing region put some stocks on my radar...

As I said yesterday:

There are more than a dozen publicly traded winemakers – most notably diversified spirits giants like Constellation Brands (STZ), Diageo (DEO), Brown-Forman (BF-B), and Paris-based companies LVMH (MC.PA) and Pernod Ricard (RI.PA). These are all high-quality businesses with strong global brands, so this is also an opportunity to take a look at their stocks.

Today, I'll follow up with a first look at Constellation, Diageo, and Brown-Forman to see if any of the three are worth a deeper dive...

1) Let's start with Constellation Brands, which is best known for Corona and Modelo beers and also has plenty of well-known brands of wines (such as Robert Mondavi) and spirits (such as Svedka vodka).

Its stock has gone through three distinct phases over the past two decades – flat from 2004 to 2012, a huge run-up into 2018, and then largely flat again for the past several years. Take a look:

Turning to the first two metrics I always look at, revenue and operating income, it's easy to see why the stock did so well from 2013 to into 2018, but it's not clear why it's flat since then:

Did Constellation become overvalued after the big run-up, and since then, have the earnings of the company been playing catch-up? Or have other factors weighed on the stock?

A quick look reveals a multibillion-dollar investment in cannabis company Canopy Growth (CGC), which has now collapsed by more than 99%, at the peak of the pot-stock bubble a few years ago. I'll need to look further into this if I decide Constellation is worth a closer look.

Lastly, valuation...

As of yesterday's close, Constellation has a $43 billion market cap and $12 billion of net debt, giving it a $55 billion enterprise value ("EV"). The stock is trading at 5.5 times revenue, 13.3 times earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and 17.4 times this year's estimated earnings per share.

In summary, Constellation looks moderately interesting at first blush...

2) Up next, Britain-based Diageo owns a wide portfolio of well-known brands – including Johnnie Walker, Crown Royal, J&B, Buchanan's, Smirnoff, Cîroc, Ketel One, Captain Morgan, Baileys, Don Julio, Casamigos, Tanqueray, and Guinness.

After hitting an all-time high at the beginning of 2022, the stock has been nearly cut in half:

It's easy to see why Diageo's stock has only doubled in the past 20 years, as the company's revenue and earnings growth has been tepid:

Turning to valuation, as of yesterday's close Diageo has a $66 billion market cap and $21 billion of net debt – giving it an $87 billion EV. The stock is trading at 4.4 times revenue, 12.7 times EBITDA, and 16.5 times next year's estimated earnings per share.

I'm not excited about Diageo based on my quick analysis – it's a full valuation for a low-growth cash cow...

3) Finally, Brown-Forman is best known for its Jack Daniel's whiskey. It was one of the greatest stocks of all time through its peak in late 2020, but since then, it has been cut in half:

The stock's performance over the past four years doesn't align with the company's financial performance, which has been solid, albeit uninspiring:

At first glance, based on these two charts, I would guess that Brown-Forman is another stock that became overvalued such that, when growth slowed, the multiple that investors were willing pay declined – as did the stock.

When it comes to valuation, as of yesterday's close Brown-Forman has a $19 billion market cap and $3 billion of net debt, which gives it a $22 billion EV. The stock is trading at 5.3 times revenue, 17.5 times EBITDA, and 22.6 times this year's estimated earnings per share.

I'm disappointed by what I've found here...

Brown-Forman hasn't shown much growth over the past decade... yet its stock, despite getting halved, trades at rich multiples.

In summary, I'm most interested in Constellation and Brown-Forman, so keep an eye on upcoming e-mails for a deeper dive on both of them.

I don't think Diageo looks as promising, so I'm going to wait to hear from readers before deciding whether to do any more work on this idea.

As always, I'd love to hear from you. If you have an opinion on any of these stocks, let me know – you can send me an e-mail by clicking here.

Best regards,

Whitney

P.S. Yesterday, my wife Susan and I went sea kayaking for a couple of hours in the Queen Charlotte Sound and then did an eight-mile hike on the Queen Charlotte Track at the northern end of New Zealand's South Island.

The scenery here is magnificent! Below are a couple pictures: