A Recession-Proof Business That's Doing Even Better Today

The U.S. economy is booming...

The most recent data showed that the U.S. economy expanded 4.3% in the fourth quarter. That followed a 33% jump in the third quarter. And now, JPMorgan Chase CEO Jamie Dimon predicts the economic expansion could remain strong as far out as 2023...

The pace of vaccinations is accelerating. That's boosting hopes for a quick return to normal life. That has served as a tailwind for "reopening" stocks – like restaurants and travel companies. These were companies that had underperformed during much of the pandemic but are now playing catch-up.

This week, we're highlighting a company that thrived throughout the lockdowns. But the gains may not be over just yet. Its recent earnings release shows it's doing just fine during the reopening period, too...

We're talking about Constellation Brands (NYSE: STZ).

Constellation Brands is one of the top alcoholic-beverage companies in the world. This includes the No. 1 imported beer in the U.S. (Corona), the No. 1 sauvignon blanc in the U.S. (Kim Crawford), the No. 1 pinot noir in the U.S. (Meiomi), and the No. 1 imported vodka in the U.S. (Svedka), along with the well-known Modelo beer brand.

We last highlighted Constellation Brands in July. At the time, we noted that it is a fantastic business that gushes free cash flow ("FCF"), has an excellent balance sheet, strong margins, and high returns on equity.

But more importantly, beer is a recession-proof business... Constellation didn't miss a beat during the past two recessions (2001 and 2009). In fact, it got even stronger – growing its gross margins, operating margins, and free cash flow margins. That's just what we'd expect from a great company.

And the company was off to a strong start through the pandemic-induced recession...

In 2020's first quarter (which ran from February through May), Constellation Brands reported revenue and earnings above estimates. And it grew its gross margins.

This is significant because those months – February through May – were the ones with the most coronavirus lockdown orders. Yet Constellation Brands still performed strongly.

The reasoning was simple – with bars and restaurants closed, people were stocking up on beer and wine for at-home consumption. Constellation Brands gets 85% of its sales through the at-home business (which it calls "off-premise" sales). And this part of its business continued to thrive throughout 2020.

But that wasn't the end of Constellation Brands' strong results...

Last week, the company reported fourth-quarter earnings per share ("EPS") of $2.06 versus Wall Street's $1.58 estimate. Revenue for the quarter was $2.08 billion, beating the expectation of $1.86 billion. That represents 9.3% sales growth from the same quarter last year.

The strong results indicate folks are still drinking lots of alcohol at home. Again, Constellation Brands does most of its business through off-premise channels. This includes supermarkets, liquor stores, and outlets. So with bars and restaurants either closed or under capacity restraints, Constellation Brands is benefiting more from at-home consumption.

In the fourth quarter, Constellation Brands said improved off-premise sales had "more than offset" the 43% decline in on-premise (restaurant/bar) sales. As a result, Constellation Brands saw its total sales grow by nearly double digits in the quarter.

For the 2022 fiscal year (which will end in February), Constellation Brands forecasts EPS of between $9.95 and $10.25. That's slightly below Wall Street's expectation of $10.32. Constellation Brands also projected full-year free cash flow of between $1.4 billion and $1.5 billion.

The recent strength has allowed Constellation Brands to increase its rewards to shareholders...

In its third-quarter release in January, the company announced a $2 billion share-repurchase authorization. Constellation Brands had $1.9 billion left on its existing buyback program, so the new authorization essentially doubled the repurchases that Constellation Brands could carry out.

The company will use 2020's record cash flow to continue rewarding shareholders... In addition to the buybacks, Constellation Brands just announced that it would be boosting its quarterly dividend payout by 1.3% to $0.76 per share.

So Constellation Brands has performed extremely well throughout yet another recession. And it's using the strength to reward shareholders. That should be a continued tailwind for shares.

Sometimes investing is simple.