Pour Yourself a Glass of Constellation Brands
Constellation Brands is shrinking to a profitable core, supplying growth at a reasonable price. Molson Coors and Brown-Forman are a bit costly.

When times are tough, people drink alcohol. But how should you satisfy your thirst for investment profit? A few companies include Constellation Brands (NYSE:STZ), Molson Coors (NYSE:TAP) or Brown-Forman (NYSE:BF.B).

On Thursday morning, wine and spirits maker Constellation — which sells brands such as Robert Mondavi, Svedka and Corona — is poised to report earnings of 65 cents per share, up 51% from 2010. Constellation has spent the past five years cutting costs and selling brands that don’t fit the “premium-category” wines priced from $5 to $20 a bottle, where it wants to cement its lead. During that time it has reduced its debt from $5.3 billion to $3 billion and cut 5,100 employees to a slimmer payroll of 4,300.

Molson Coors does not look to be in such market-beatingly good shape. Its second-quarter profit of $1.23, reported Aug. 2, fell 4.65% below analysts’ expectations. And in the past month, analysts cut their Molson Coors EPS projections for 2011 — by three cents to $3.55 per share — and by seven cents to $3.74 per share for 2012.

Brown-Forman, maker of premium brands such as Jack Daniel’s, Finlandia, Southern Comfort and Canadian Mist, is doing much better. Brown-Forman’s adjusted EPS grew 7% to 81 cents per share in the first quarter of fiscal 2012 on 12.8% revenue growth thanks to its strong performance in the international market.

So which beverage companies should you buy? Avoid Brown-Forman and Molson Coors and consider investing in Constellation. Here’s why:

  • Constellation: Shrinking, profitable company; fairly valued stock. Constellation revenues fell 1% to $3.2 billion in the past year while its net income popped 463% to $485 million, yielding a very wide 15.1% profit margin. And its price/earnings-to-growth ratio of 1.0 — where a PEG of 1.0 is considered fairly valued — is reasonable at 1.0 with a P/E of 6.8 on earnings forecast to grow 6.8% to $2.08 in fiscal 2013.
  • Molson Coors: Growing, highly profitable company; overpriced stock. Molson Coors’ revenues are up 7.3% in the past year to $3.3 billion while its net income fell 8.4% to $675 million, yielding an impressive 20.3% net profit margin. But its PEG is an exorbitant 2.09 on a P/E of 11.1 with earnings forecast to grow 5.3% to $3.74 in 2012.
  • Brown-Forman: Growing, profitable company; overpriced stock. Brown-Forman revenues are up 5.5% in the last year to $3.5 billion while its net income rose 27.5% to $578 million, yielding a solid 16.5% net profit margin. But its PEG is an overvalued 1.98 on a P/E of 17.8 with earnings forecast to grow 9% to $4.01 in fiscal 2013.

Constellation is the winner in this bunch. Its refocusing is producing profit growth that’s likely to exceed its current low valuation. Molson Coors and Brown-Forman are solid performers, but investors love them too much.

Peter Cohan has no financial interest in the securities mentioned.

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