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Andreas in Gainers & Losers,

Investment idea - Constellation Brands

I am still upbeat about the shares of Constellation Brands (STZ), a leading US producer of alcoholic beverages. The company recently released a strong financial report for 2Q16. According to the report, revenue increased 8.1% y-o-y to USD 1.73 bn. Sales of beer (+14% y-o-y) became a revenue growth driver, as in the previous quarter. Operating profit rose 21.2% y-o-y to USD 501 mn, while operating margin jumped 3.1 pps to 28.9%. Adjusted EPS spiked 40.5% y-o-y to USD 1.56, outpacing expectations by 18%.

Robust financial results in Q2 allowed the company’s management to upgrade its financial forecasts for FY16. EPS was revised up from USD 4.80-5.00 to USD 5.00-5.22 (+13-18% y-o-y).

Given the company’s ability to consistently generate significant cash flows, the management of Constellation Brands recently announced the launch of a dividend program. Quarterly dividend will amount to 31 cents, yielding 1%. Taking into account strong growth prospects, the company promises to boost regular shareholder payouts going forward.

The company continues its aggressive activity on the M&A market. In August, Constellation Brands acquired a minority stake in Chicago-based spirits company Crafthouse Cocktails through its newly formed venture division Constellation Ventures. Established in 2013, Crafthouse Cocktails produces premium class ready-to-drink spirits-based cocktails. Its product portfolio includes such cocktails as Moscow Mule (vodka-based), Paloma (tequila-based) and Southside (gin-based). The company’s management notes the strong growth prospects of such small companies focused on a certain narrow niche of the alcohol market and hopes that cooperation with these companies will give an additional innovative impetus to business development.

Earlier this year, Constellation Brands completed the acquisition of Meiomi, a major producer of premium class wines. As a result of the transaction, the company obtained the rights to the Meiomi brand, as well as a significant store of pinot noir and chardonnay wines. The deal is expected to significantly expand the portfolio of Constellation Brands’ wine brands, as well as to increase the company’s financial performance due to Meloni’s large-scale, fast-growing and high-margin business.

I believe that new acquisitions will positively affect the company’s financial performance. This trend, coupled with higher dividend, will boost the share price of Constellation Brands. I left my target price of Constellation Brands’ shares unchanged at USD 145 and rate the name as a Buy in the mid-term. The short-term technical target is USD 138.