Shares of Constellation Brands (STZ) had a nice pop on July 1, rising 7.3%, to 13.61, after the maker of wine, beer, and other spirits reported quarterly results that surpassed Wall Street. The question is whether the company's restructuring efforts will pay off in the long run.

The Victor (N.Y.)-based company, which makes brands such as Robert Mondavi and Clos du Bois wines, Corona beer, and Black Velvet and Skol spirits, earned $6.5 million in its fiscal first quarter ended on May 31, a far cry from $46.6 million in the same period last year. Excluding charges, earnings per share came in at 33¢ per share, a penny above analysts' consensus forecast, vs. 34¢ a year ago.

"The macroeconomic environment remains challenging, but we continue to focus on the right strategies to generate cash, reduce borrowings, increase return on invested capital, and improve the bottom line," said CEO Rob Sands in a press release.

splits into three divisions

Constellation Brands' shares have been suffering while the company has focused on its premium brands and divested of certain value brands. So far this year, the stock has dropped nearly 14%, and is well below its 52-week high of 23.48 reached last September. The drop was partly due to restructuring fees the company incurred when it recently split into three separate divisions: Constellation Wines, Constellation Spirits, and Crown Imports.

While the focus for many consumer products companies has been on value and lower-priced items for cash-strapped consumers, Constellation Brands is betting that consumers will pay for premium-priced beverages. In March 2009, the company sold its value spirits business for $330.5 million. And in February 2008 it sold wine brands Inglenook and Almaden for $133.5 million. In the meantime, the company is focusing on paying down debt; it has paid about $110 million so far of more than $5 billion in outstanding debt.

Analysts on Wall Street are divided in their opinions about Constellation Brands, with 6 out of 9 rating the stock a hold or underperform, according to Thomson/First Call. Among the bulls is Timothy Ramey of D.A. Davidson & Co. (which is seeking to do investment banking for the company), who has a buy opinion on the shares. With the stock trading at less than 10 times earnings, Ramey likes both its valuation and the company's better-than-expected earnings. He also cites the defensive nature of wine and spirits. After all, consumers tend to buy wine whether the economy is down or not, he says.

Esther Kwon at Standard & Poor's Equity Research reiterated her buy opinion on the stock on July 1, saying the company beat her earnings forecast because of better cost savings than she expected. "We continue to see STZ as a deleveraging and cost reduction story and look for potential benefits from distributor consolidation," Kwon wrote in a note. She kept her earnings estimate of $1.62 per share for the 2010 fiscal year ending in February, but raised her target price by 1, to 16 a share, because stocks of the company's peers trade at higher multiples.

Ramey believes that Constellation Brands' bet on premium spirits will be successful given that premium sales are still growing faster than value spirits. Only time will tell if that will translate into higher profits and help boost its stock price.

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