If there has been a hard lesson that investors have been forced to learn over the past five years or so, it is that growth has been difficult to achieve for many of the historically significant food and beverage companies that have staples of conservative, long-term oriented portfolios for generations (the likes of Kellogg, Anheuser-Busch, Mondelez, General Mills, Kraft-Heinz, and even Coca-Cola up until recently) have struggled to deliver the type of earnings per share growth that has been consistent with the creation of high-probability, intergenerational wealth.
In contrast, I find it useful to study the companies that are similarly situated in the same sector as the slower growers and still continuing to deliver outperformance.
In particular, I’d like to call your attention to Constellation Brands (STZ), a company that sells beer, wine, and spirits, with over 81% of its profits originating in the United States. The company owns many well-known brands, including Modelo (in the United States), Corona, and Svedka vodka. This alcohol conglomerate, which earned $1.25 per share in profits in 2003, now earns $8.90 per share in profits. It is useful to study this alcohol company managed to compound earnings per share growth at a rate of 13.05% annually while the rest of the large-cap alcohol and spirits sector (save for Brown-Forman) tended to grow at a mid-single digit rate at best.
First, it should be noted that Constellation Brands identified a growth market niche and dominated it. It partnered with Experian and Elsevier to data-crunch areas where the highest number of Hispanic males in the age 21-56 demographic resided and then ruthlessly advertised Modelo and Corona to those markets. As a result, it earns 24.5% net profits on those brands (keep in mind Coca-Cola earns 26.8% net profits, the long-term gold standard profit rate) and experiences volume growth in the 6-8% range. The heavy advertising campaigns for these brands has resulted in sustained volume growth and has enabled Constellation to dodge the “commodification” of beer competition where the crowded nature of the beer aisle has caused many brewers to hesitate in raising or maintaining its prices.
Along with Brown-Forman, the management team seems to understand the importance of brand-building. In order to make real money over the long run, customers need to be willing to pay more for a product over and over again. That’s the key to wealth. In business schools, they call it the Dupont Return on Equity Equation, where the prosperity of a firm can be determined by focusing on the difference between the cost of production, the price sold above the cost of production, and the multiplier of how many times a sale occurs. That’s it. Every great multi-generational fortune involves the favorable execution of that equation.
On that end, Constellation gets it. Svedka, Corona, and Modelo are receiving huge influxes of advertising dollars (in the tens of millions) to build the brand and form the habit of those being the drink of choice even if they cost a little more than the cheap option on the shelf.
Often enough, the mark of a great business is the ability to raise prices and grow volumes simultaneously. Constellation is selling 3x as much wine, beer, and spirits as it did in 2003. And the average price of its product portfolio has increased by 6.5% per year, above the industry average of 4.2% during the same time frame. If you want to figure out strong brands, look to the entities raising prices and still growing volumes.
Personally, I have never owned Constellation Brands stock due to the extreme leverage of the company’s balance sheet. It has $13 billion in debt, $98 million in cash, and earns profits of $1.7 billion. The first time I really looked at it was in 2014, when it had $10 billion in debt and $850 million in profit, and I didn’t care for that 11.7x leverage ratio. Now, by virtue of the profit growth growing faster than the total debt, the debt-to-profit ratio is down to 7.7x, which is tolerable so long as the Corona, Modelo, and Svedka brands remain strong.
I think Constellation will continue to be a double-digit compounder. Alcohol companies with strong managements tend to be great places for the creation of long-term wealth. I mean, my gosh, the stock fell down to $10 during the financial crisis. Ten bucks! And now it’s over $200. My guess is that, five years from now, the profits will be around $14 per share. And the stock will be somewhere around $275 to $300. I think it would need to fall to $135 per share for it to become the best long-term investment out of available large-cap companies. It’s a great company that is reasonably streched in terms of valuation. For now, it’s best to study the company from afar and appreciate that it belongs in a long-term portfolio when the price is right.