Constellation Brands (STZ:NYSE) $251

Market Cap: $45.9 billion

It’s unusual to find a high-quality company which consistently beats earnings expectations whose shares aren’t at least fairly valued if not overvalued.

It’s even more unusual when that gap between valuation and underlying performance involves a large, well-known consumer goods company.

Investors can be forgiven for missing out on small-cap opportunities, but we would expect them to be more on the ball when it comes to firms the size of Constellation Brands (STZ:NYSE).

With a market cap second only to Diageo (DGE) in the global alcoholic beverages sector, Rochester, New York-based Constellation is a producer of beer, wines and spirits and the biggest beer importer in the US.

It also has a stake in Canadian medical and recreational cannabis firm Canopy Growth, although it no longer allocates any capital to the business and is actively undoing its ties.

What we like about the company is its strong market position, the power of the brands it imports – mainly Corona, Modelo and Pacifico – and its ability to grow earnings by an average of more than 15% per year since the early 1990s, a feat which continually seems to catch the market by surprise.

Heading into last week’s first-quarter trading update, most Wall Street analysts were expecting the firm to miss earnings and guide down full-year forecasts.

Instead, the firm reported better-than-anticipated beer volumes, which led to improved operational gearing, lifting operating profit and earnings per share which came in at $3.57 against a consensus of $3.46 per share.

The company also raised its outlook for the year to the end of May 2025 rather than cuttings forecasts, sending analysts back to their cubby-holes to re-think their numbers.

‘Our beer business continued to achieve strong volume growth well above that of its category and total beverage alcohol,’ commented president and chief executive Bill Newlands.

‘This outstanding performance supported the second-largest dollar share gain within the broader beverage industry and reinforced our significant growth outperformance relative to the entire consumer packaged-goods sector.’

In the quarter to the end of May, the firm posted a 53% gross margin (sales minus cost of goods sold) and a 35% operating margin while return on invested capital was in the region of 15% on an annualised basis.

For this, investors are being asked to pay around 19 times this year’s earnings when the average valuation of the last three decades is more than 30 times and the shares have regularly traded at more than 50 times earnings. 

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