On July 3 Constellation Brands (STZ), which sells popular beer and wine brands like Corona, Modelo, and Robert Mondavi, reported strong fiscal Q1 2025 results (ending May 31). Based on its strong free cash flow outlook and share buybacks, STZ stock looks cheap to value investors.
STZ is trading at $257.08 in morning trading on Friday, July 5, up 2.68%. The stock is still well off its recent high of $265.01 on April 8. But that may not last long.
For example, based on the stock's strong cash flow outlook it could be worth 63.4% more at $421 per share. This article will describe why.
Strong Cash Flow and FCF Outlook
Constellation Brands management reported that sales of its beer business is having “high single-digit net sales growth and double-digit operating income growth.” Beer was up 8% Y/Y in net sales and up 7.6% in shipment volumes. The beer operating income was up 16% Y/Y.
Overall the company's net sales were up 6% to $2.662 billion and its operating income was up 12%. More importantly, it generated an operating cash flow of $691 million during the quarter, up 4% Y/Y. That represented 26% of its net sales, a very strong cash flow margin.
However, the company said its free cash flow (FCF) fell 19% to $315 million, due to heavy brewery capex spending. However, that still represented a respectable 11.8% of its sales.
Moreover, management said it expects to make between $1.4 and $1.5 billion in FCF this year. That represents an average of 13.7% of analysts' sales estimates of $10.6 billion for the year ending Feb. 2025.
In other words, the company will generate large amounts of FCF. It is using this to buy back shares and pay dividends to investors. This is why it makes the stock attractive to value buyers.
Target Price for STZ Stock
One way to value STZ stock is to use an FCF yield analysis. This is done by estimating future FCF and then dividing it by a yield assumption.
For example, right now STZ stock has a 1.61% dividend yield, so if we divide management's estimate of $1.45 billion in FCF by 1.61% the future market cap could be $90 billion (i.e. $1.45b/0.0161 = $90 billion).
That is almost double today's market cap of $45.6 billion (i.e., $90b/$45.6b = 1.97-1=+97%). But, just to be conservative, let's use a 2.0% FCF yield metric. That lowers the estimated market cap to $72.5 billion (i.e., $1.45 billion / 0.02 = $72.5 billion). That is 59% higher than today's market cap.
That implies that STZ stock is worth 59% more than the prior close of $257.75 or $409.82 per share.
However, the market always looks forward, in terms of valuation. For example, next year analysts forecast $11.31 billion in net sales. Applying a 26% operating cash flow margin of 26% and $1.45 billion in capex spending implies its FCF will be $1.49 billion.
So, applying a 2.0% FCF yield results in a market cap estimate of $74.5 billion. That is 63.4% higher than today and implies STZ stock will be worth $421 per share sometime in the next year.
Analysts Have Much Higher Price Targets
This makes the stock very attractive to value investors. For example, the average price target of 22 analysts surveyed by Yahoo! Finance is $300.74 per share. Barchart's survey says the mean target price is $299.45 per share.
Moreover, AnaChart, a new sell-side analyst tracking service, reports that 21 analysts have an average price target of $291.41. That is over 18% higher than yesterday's closing price.
More importantly, some of the best-performing analysts in this stock, according to AnaChart, have much higher price targets. This can be seen in the table below.
This shows that two analysts, who have high Price Targets Met Ratio stats have price targets well over $300. For example, John Staszak, of Argus, has hit his price targets 70% of the time on this stock. He projects that it will reach $306 per share now, which is 19% higher than today.
Similarly, Robert Ottenstein of Evercore, who has a 54.55% Price Targets Met Ratio stat, projects a $310 stock price for STZ stock. That is over 20% higher.
The bottom line is that analysts expect to see STZ stock move much higher.
Shorting Puts and Calls
One way to play this is to sell short out-of-the-money (OTM) puts and calls. For example, the July 26 $250 strike price put trades for $1.45. This strike is about 2.5% below today's price but provides an immediate yield of 0.58% (i.e., $1.45/$250) to the short seller.
Alternatively, or even in conjunction with this trade, investors can sell short a $275 strike price call options. That trades for 40 cents on the bid side for a strike that is almost $20 higher. In other words, the investor can still make this $20 in capital gains along with the $0.40 in income, or a potential 7.16% return (i.e., $275.40/$247.00 today) over the next 3 weeks.
The bottom line is that value investors believe that STZ is cheap here. One way to play it is to short OTM puts and calls.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
