In its beer segment, which accounts for the vast majority of its revenue, volumes are down 8.7%, sales are down 7%, and operating profit is down 12%. In the wine and spirits segment, which has been a very small minority since the last two asset disposals, sales have tumbled 19% and operating profit has fallen to zero.
Like its peers, Constellation is having to cope with a sharp drop in volumes in its beer segment, which historically have resisted much better than its competitors—largely thanks to the success of Modelo and the Latino audience in North America.
In H1, the group generated cash profit—or free cash flow—of $1.1bn; over half, i.e. $604m of this was used for share buybacks, $361m for dividend distributions and the remainder, combined with the proceeds from the latest asset sale, was used to reduce debt.
H2 will be marked by significant investments, both in working capital and fixed assets. In this respect, free cash flow for the full year is likely to be between $1.3bn and $1.4bn.
The general trend is towards an erosion of profits compared to previous years. At 17x-18x free cash flow relative to its market capitalization, and 10x its operating profit before investments (EBITDA) relative to its enterprise value, Constellation is still valued at a significant premium to its peers, although this gap is narrowing.
Analysts at MarketScreener, while they have repeatedly praised the management of the Rochester-based group, were nonetheless surprised to see it sustaining valuation multiples so clearly uncorrelated with the sector. The recent contraction in multiples is therefore, in reality, a not entirely unexpected adjustment.
