Constellation Brands (STZ), an international producer of wine, beer and spirits, has steadily outperformed the S&P 500 this year, gaining 76 percent as of Tuesday’s close compared with the 19 percent gain in the broad index. Over the past three months, Constellation has moved higher in waves – gaining in price from $52 per share to more than $62.
Support comes under price at $60 per share, as well as at the 50-day moving average ($58.33). The stock is also trading above the 200-day moving average ($53.08). There is also a bullish indicator on the MACD indicator, which is a measure of momentum.
A LOOK AT FUNDAMENTALS
Strong underlying fundamentals confirm Constellation’s short-term bullish technical indicators. Basic diluted EPS was 96 cents for the most recent quarter, still 35.21 percent higher year-over-year. Net sales for the second quarter were $1.46 billion, nearly double the $798 million for the same quarter last year. The huge increase was driven by $763 million of incremental net sales related to the consolidation of Crown – one of Constellation’s joint ventures with Grupo Modelo. Net sales for the beer segment continued to be strong, while wine and spirits net sales were comparable to the prior year.
Operating cash flow also showed strong growth, coming in at $489 million compared to $368.5. Constellation’s trailing price to earnings is 6.5, below the industry average of 13.15 and below the S&P 500 average of 18.07. Over the last five years, the company’s shares have traded in the range of 5.71 to 48.85 times trailing 12-month earnings. According to Tradespoon’s proprietary indicators, Constellation’s current financial strength exceeds that of its industry.
More specifically, STZ’s head to head comparison to its main competitors shows that the company has lowest gross margin, but still higher than the industry average; but, best operating margin, which is also much higher than the industry average. The stock trades at a lower P/E ratio than the main competitors, and lower than the industry average. Also, the price to earnings growth (PEG) ratio is lower in comparison to the industry average.
STZ is also currently trading below its intrinsic value of $64.80, suggesting that the stock is undervalued at these levels.
OPTIONS STRATEGY RECOMMENDATION
Technical and fundamental indicators both show short-term bullish signals for STZ. As a debit call strategy, we look to profit on the stock’s rise to as high as $65. Buying a November at-the-money call (strike price of $62.50) and selling the $65 call for a net debit of $0.95, traders can make a maximum profit of $1.55 compared with a possible loss of $0.95.
