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Jefferies: Constellation Brands Is Our Top Large-Cap Growth Idea

STZ, T.WEED | October 3, 2018

Shares of alcohol beverage maker Constellation Brands, Inc. (NYSE: STZ) have lost 7 percent year-to-date and the steep discount versus its peers makes it Jefferies' top large-cap growth idea.

The Analyst

Kevin Grundy maintains a Buy rating on Constellation Brands with an unchanged $283 price target.

The Thesis

Constellation Brands is scheduled to report its second-quarter results Thursday morning, which Grundy said should come in ahead of expectations. The company likely benefited from favorable summer weather and product innovation. Third-party sales trends from Nielsen suggests a 13.5-percent growth in the beer business, which accounts for around 70 percent of total profit.

Constellation is expected to report Q2 earnings of $2.60 per share on sales of $2.25 billion.

Investors can expect to see a downward revision to management's $9.40 to $9.70 EPS guidance for the full year due to the $4 billion investment in Canopy Growth Corp (NYSE: CGC), Grundy said in a note. A reasonable guide down to a new range of $9.10-$9.40 is justified due to near-term dilution and any accretion from the deal isn't expected until fiscal 2021.

The stock's weakness since the start of the year implies shares are trading at 15 times NTM EV/EBITDA (excluding the Canopy portion of the business), which is a discount to the 17 to 18 times recent average and its peers who trade at around 21 to 22 times.

As such, the stock is a top large-cap growth idea based on expectations for continued growth in beer through at least 2021, exposure to the new cannabis market and an attractive valuation.