Why Constellation Brands Sold Ballast Point

Constellation Brands (STZ) is selling its Ballast Point craft-beer brand and certain associated production facilities and brewpubs to Kings & Convicts Brewing Co.

As announced on December 3, the company is retaining its craft and specialty operations in Daleville, Virginia. Constellation Brands expects to complete the deal by the end of fiscal 2020.

Why Constellation Brands made this decision

Constellation Brands, a leading alcoholic beverage maker, acquired Ballast Point in 2015 for $1 billion. Expansion in the high-growth premium market of craft beer was the motive. However, Constellation Brands is now selling Ballast Point amid a recent slowdown in the space.

The company intends to focus on its higher-margin imported beer portfolio, which includes popular names such as Corona, Modelo, and Pacifico. The company also intends to devote its resources to new product launches such as Corona Hard Seltzer, which will roll out this spring.

Constellation is also streamlining its wine and spirits portfolio to prioritize higher-end, fast-growing brands. In August, the company announced its divestment of its Black Velvet Canadian Whisky to Heaven Hill Brands. In April, it signed a deal with E. & J. Gallo Winery to divest about 30 brands under its wine and spirits portfolio priced at $11 retail and below. The company now expects to complete the divestment by the end of fiscal 2020.

Recent performance

Constellation Brands’ fiscal 2020 second-quarter net sales grew about 2.0% YoY (year-over-year) to $2.34 billion. Its sales were in line with analysts’ estimates. The company’s Beer segment continued to drive its top line growth. The segment’s sales grew 7.4% to $1.64 billion as Modelo Especial and Corona delivered strong performances. However, the Wine and Spirits segment’s sales fell 8.9% to $703.6 million. This sales decline reflected the impact of the transformation of its wine and spirits portfolio.

Its adjusted EPS fell 5.2% to $2.72, but it came in ahead of analysts’ forecast of $2.60. Equity losses of $0.20 per share related to its investment in cannabis company Canopy Growth (CGC) also affected its earnings. Overall, the company’s share of Canopy Growth’s equity losses was $484.4 million on a reported basis. The equity losses were $54.7 million on a comparable basis in the second quarter. On its second-quarter conference call, the company indicated that it was looking forward to the launch of Canopy Growth’s higher-margin edibles and drinks under Cannabis 2.0 in Canada. To know more about Canopy Growth’s growth initiatives, read Cannabis 2.0: Assessing CGC’s Strategy.

Constellation Brands lowered its fiscal 2020 reported EPS guidance to the range of $0.55–$0.75 from its prior outlook of $4.95–$5.25. However, it raised its adjusted profit forecast to the range of $9.00–$9.20. Its previous outlook for adjusted EPS was between $8.65 and $8.95.

STZ’s movement this year

Constellation Brands stock has risen 14.6% YTD (year-to-date). In comparison, Anheuser-Busch InBev stock has risen 20.7%, while Molson Coors stock has fallen 9.0% YTD.

Constellation Brands stock has “buy” recommendations from 15 out of 21 analysts. Meanwhile, six have given it “hold” ratings. Analysts expect the company’s adjusted EPS to fall 9.1% to $8.44 in fiscal 2020. They expect its sales to fall 0.8%. They expect lower wine and spirits sales to offset the strength in the company’s Mexican beer portfolio. With a 12-month price target of $226.70, analysts see an average upside potential of about 23% in the stock.