My interview with Greenlight Capital's David Einhorn tomorrow; A closer look at Constellation Brands

1) I'll soon be joining my good friend David Einhorn for an interview...

As the founder of Greenlight Capital, David is famous in the hedge-fund business. And tomorrow, we'll be doing a live Zoom from 2:30 p.m. to 3:30 p.m. Eastern time – hosted by stock-picking website SumZero.

During our conversation, David and I will be discussing stocks, the markets, and (full disclosure) the state of New York City and my mayoral bid. After opening remarks, we'll take questions from the audience. It's free to attend, and you can join us by registering right here.

2) Let's come back to the financials with spirits giant Constellation Brands (STZ)...

As regular readers know, I've had the stock on my radar since my recent trip to New Zealand and my bike tour of the country's main wine-producing region. As I said in my November 12 e-mail about the excursion:

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.

Then, in my next two e-mails, I took a quick look at all five stocks and asked my readers which one(s) they wanted me to do a deeper dive on. On November 13, I shared a quick overview of Constellation Brands:

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:

Then, I continued with a look at Constellation's historical 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.

Finally, there was the question of valuation. As I said in my e-mail:

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...

When I discussed that initial overview on Constellation last month, STZ shares had closed at $238.29 the day before. On Friday, they closed at $239.66... right about the same level.

So today, let's take a closer look at Constellation's financials to determine whether they look promising enough to do a deeper dive on the company...

After looking at a company's revenues and profits, I always like to next look at the cash-flow statement to see if free cash flow ("FCF") matches earnings. Take a look at the below chart of Constellation's operating cash flow, capital expenditures ("capex"), and FCF:

I'm moderately concerned about what I see here...

While Constellation generates a healthy amount of FCF, it's slightly down over the past five years – which doesn't match up with the steadily rising revenues and earnings the company is showing on its income statement.

This would need to be explored further in a deeper dive – especially why capex has nearly doubled since 2019.

Turning to the balance sheet, we can see that Constellation's net debt rose sharply from 2012 to 2018, but has declined a bit since then:

From 2012 through the latest quarter, Constellation has generated about $15.3 billion of FCF... but net debt has gone up. So let's take another look at the cash-flow statement to see how the company has been allocating its FCF:

This explains the surge in debt in 2013 – but it was for a good reason...

Constellation paid about $4.8 billion to purchase the U.S. rights to the Grupo Modelo beer portfolio, which includes brands such as Corona, Modelo Especial, and Pacifico, from Anheuser-Busch InBev (BUD).

To address regulatory concerns about monopoly risks in the U.S. beer market resulting from its acquisition of Grupo Modelo, Anheuser-Busch InBev was forced to sell the U.S. distribution rights and a brewery in Mexico.

Whenever there is a forced seller, the buyer is likely to do well – and Constellation did. Just look at how much revenues, earnings, and FCF grew in the seven years after the acquisition...

There isn't much else of interest in terms of capital allocation. Constellation made two more billion-dollar acquisitions in 2016 and 2017, has been paying a steady dividend for the past decade (it currently yields about 1.7%), and bought back more than $1 billion of stock in 2016, 2017, 2021, and 2022, which has reduced its share count by 23% in the past two decades:

In summary, while there are a few small areas of concern, overall I like what I see here with Constellation's financials.... and the valuation is modest (again, STZ shares are at about the same level they were last month when I broke down the valuation). So stay tuned for a deeper dive!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.