Impressive earnings trend
Constellation Brands (STZ) exceeded analysts’ earnings expectations in all the quarters of fiscal 2016 and fiscal 2017 and in the first two quarters of fiscal 2018. Excluding one-time items, the company posted adjusted EPS (earnings per share) of $2.47 in fiscal 2Q18, which ended on August 31, 2017. The company’s fiscal 2Q18 adjusted EPS significantly exceeded analysts’ consensus estimate of $2.16.
Recap of 2Q earnings
Constellation Brands’ adjusted EPS grew by a strong 40.0% on a year-over-year basis in fiscal 2Q18. This significant growth in the company’s adjusted EPS was driven by the sales growth in fiscal 2Q18 and operating margin expansion. In particular, the operating margin of the company’s beer segment expanded significantly due to expense leverage on higher sales, favorable pricing in certain markets, and favorable foreign currency fluctuations.
Constellation Brands’ earnings in fiscal 2Q18 also benefitted from lower interest expense as a result of lower average interest rates. A lower effective tax rate also had a favorable impact on the company’s bottom line. Constellation Brands’ adjusted effective tax rate was down at 20.5% in fiscal 2Q18 compared to 31.8% in fiscal 2Q17. The lower tax rate was a result of a change in the treatment of the indefinite reinvestment of certain foreign earnings in fiscal 3Q17 and the company’s March 2017 adoption of the accounting standard associated with excess tax benefits from stock-based payments.
Analysts’ 3Q expectations
For fiscal 3Q18, which ended on November 30, 2017, analysts expect the company’s adjusted EPS to decline 4.1% to $1.88. Higher expenses in the quarter are likely to have an adverse impact on the company’s bottom line.
Rival Molson Coors Brewing (TAP) reported its 3Q17 results on November 1. The company’s adjusted EPS declined 3.6% to $1.34 mainly due to lower sales.
We’ll assess Constellation Brands’ valuation in the next part of this series.