RBC Capital Markets released a revised list of its top picks in the Consumer Staples sector. Constellation Brands, (NYSE: STZ) still remains the highest conviction idea on the list.
Constellation Brands, one of the leading producers and marketers of beer, wine, and spirits, has seen its stock gain 9% since the start of 2021 and up 40% over the past year. RBC’s Nik Modi maintained an Outperform rating on Constellation Brands’ stock in a Tuesday report with a price target lifted from $262 to $300. The revision implies upside potential of nearly 30% from current levels.
Tailwinds for Constellation Brands
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Modi wrote in a note that he favors: 1) US-focused companies that are able to leverage pricing power, and 2) companies that are able to show a compelling growth story that is under-appreciated by investors.
Constellation Brands fits the bill with respect to the two criterias. Stay-at-home orders in the US forced consumers to move towards big name brands like Corona/Modelo over the past year.
Modi further argued he sees a premiumization trend in the markets, which should help the wine and spirits business of the company. Wines in the $10+ price category benefited from an estimated 8 to 9 percent compounded annual growth rate (CAGR) from 2015 to 2019 versus a 1% annual decline in lower priced wines. The analyst expanded:
“Not only do we believe the premiumization trend is sustainable, but we think investors are not giving STZ management due credit for their brand building capabilities.”
STZ stock is undervalued
STZ stock currently trades at around 20 times FY’22 EPS (excluding its stake in Canopy) which represents a 30% discount versus its peers in the alcoholic beverages industry. This is despite the fact that the company has industry-leading growth and margin profiles.
The analysts at RBC Capital markets are modeling for the valuation gap to close based on Constellation Brands’ disciplined capital allocation along with its strong fundamentals and an overlooked wine business poised for growth.