Free Cash Flow Deep Dive: Constellation Brands (STZ)

Strong free cash flow generation over time with continued prospects for growth

Overview

Constellation Brands (STZ) is a leading international producer and marketer of beer, wine, and spirits.   Notable brands produced by Constellation include Corona, Modelo, Robert Mondavi, and Ruffino.  The company has a heritage of more than 75 years starting in the U.S.   Today they have operations in the U.S., Mexico, New Zealand, and Italy.  Its brands are distributed globally.  79% of revenues come from beer, 18.2% from wine and 2.8% from Spirits.  They do not disclose geographic revenues.  In addition to beverage operations, they have a small investment in medical cannabis producer Canopy Growth.  Constellation Brands was one of 69 Russell 3000 companies identified in my recent screen for consistent cash flow generators.

Screening For the Most Consistent Cash Flow Generators in a Richly Valued Market (substack.com)

Why Focus on Cash Flow?

When you are purchasing stock in a company, you are buying a piece of the business.  You are an owner, as opposed to a creditor that is loaning money to the company.  Whether buying 100 shares or a substantial percentage of a company, you should evaluate the investment as an owner.  Successful companies must generate revenues by selling their goods or services at a higher price than the all-in costs of providing those goods or services.  In the long run, the business must generate both revenues and profits.  It must also turn those revenues and profits back into cash which can be distributed to owners, used to pay creditors, or reinvested in the business.  Not all companies are equally successful at this last step.  They may be generating sales by allowing very lax credit terms, and it may take a long time (if ever) to collect on those sales.  Many companies with rapidly growing revenues have ended up in bankruptcy as a result.  In evaluating a company, you need to look at many factors. Four critical factors are the ability to generate revenues, grow those revenues over time (otherwise you will not keep up with inflation!), generate profits from those revenues, and turn those profits into cash flow.  You cannot pay your bills with net income alone – cold hard cash is required.

Background information on cash flow ratios and Russell 3000 summary data on cash flow ratios can be found at:

Evaluating Stocks using Free Cash Flow - by Tom Robinson (substack.com)

Information on the current valuation of the market relative to free cash flow can be found at:

How Richly Priced is the Current Market Relative to Free Cash Flow? (substack.com)

Disclosures

Unless otherwise specified data is as of February 4, 2024, and sourced from Y-Charts.   At the time of this writing, I am planning a long position in Constellation.