Constellation Brands: Not So Stellar

Shares sank Thursday after the wine maker posted disappointing results and trimmed its earnings outlook

The beverage maker Constellation Brands (STZ) said Jan. 4 that its profit missed expectations and warned that it faces a tougher year ahead, triggering a sell-off in its shares.

The Fairport (N.Y.)-based company is grappling with challenges like selling its wine in the U.K., at the same time it faces higher costs following its acquisition of the Canadian wine maker Vincor International Inc.

Constellation Brands posted earnings per share (EPS) of 45 cents during the quarter ended November 30, 2006, down 2.2% from the same period of 2005. The mean analyst estimate had been for 60 cents EPS, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

The company has been growing its business worldwide with recent acquisitions. News hit in July of its plans for a joint venture with the Mexican beverage giant Grupo Modelo to market beer beginning in 2007, for example. The company also completed its acquisition of the Mississauga, Ontario,-based Vincor on June 5.

"Strong imported beer performance, growth from branded wine in North America, and the addition of Vincor generated solid results for the quarter," said CEO Richard Sands. "We continue to be very optimistic about our portfolio's long-term growth potential, although our third quarter results reflect ongoing softness in our U.K. branded wine business as very challenging market conditions persist."

The company's net sales rose 18% year over year to $1.5 billion. But that reflects the addition of Vincor; branded wine organic net sales fell 1% when you take currency differences into account.

Those Vincor gains didn't come for free. Constellation Brands' interest expenses rose 52% to $73.1 million for the third quarter 2007, largely due to the financing of the $1.5 billion acquisition.

Meanwhile Constellation Brands is battling tough competition in the U.K., where low cost bulk Australian wine is available. The competitive market has prevented the annual U.K. duty increase from getting passed onto the retailers, who buy wine from companies like Constellation Brands.

Noting the increasingly competitive U.K. market conditions, the company revised its fiscal 2007 EPS outlook to $1.65 to $1.70 from its previous estimate of $1.72 to $1.76.

The stock price fell 10.6% compared to the previous close to trade around $25.39 in midday trading on the New York Stock Exchange.

"We believe the Vincor acquisition and STZ's venture with Modello SA to distribute Corona and other beers will provide the scale for future efficiency gains," said Standard & Poor's Corp. analyst Raymond Mathis. "But we think start-up costs and higher debt loads will likely be dilutive over the near term." (S&P, like, is owned by The McGraw-Hill Companies.)

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