CONSTELLATION BRANDS
Fuad Fadel
Jim Fish
Kevin Kaznica
Matthew Krajna
TABLE OF CONTENTS

Business Segments




Key Risks





Wine
Spirits
Crown Joint Venture
Health of the Consumer
Joint Venture uncertainty
Financial condition
Corporate governance
Valuation



Multiple Scenario DCF
Sum of Parts
Market Multiples
 Sell
Recommendation: $17 Price Target
Business Segments
Wine
Spirits
WINE SEGMENT

Constellation




Lags industry CAGR of 3%
Approx. 90% of sales
Overall depletion trends lag industry
Levered to the United States

Industry





Mature industry
EM drive growth
Value Trend
Franzia Winetaps (The Wine Group) has
largest market share of 7.9%
Constellation lacks a Top 5 Wine Brand
within the industry, by market share
WINE GROWTH
% Growth
Wine Sales YoY
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%

Forecast
 2.25% growth
 -20% Actual

Decreasing CAGR
 Lagging industry
CAGR of 3%
2012 2013 2014 2015 2016 2017
E
E
E
E
E
E
-0.97 -17.8 2.25% 2.25% 2.25% 2.25% 2.25%
2005 2006 2007 2008 2009 2010 2011
Growth 19.00 13.47 18.79 -1.83
-3.14
-7.93
5 Year Wine Sales CAGR
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E
SPIRITS

Constellation
 Approx. 10% of sales
 SVEDKA double-digit growth
 No EM exposure, small market share

Industry
 Global competitors
 EM driving growth
 Driven by flavored
vodkas
SVEDKA GROWTH

Geographic Reach


SVEDKA primarily U.S. based
U.S. consumer remains
fragile
CROWN IMPORTS

Constellation

Crown Imports ≈ 40% of EPS FY2011



43% of EPS FY2012
No solid commitment from Modelo beyond 2016
3% growth in Net Sales

Industry


Craft/Imports are fastest
growing category
Social trend away from
“traditional” beers
Key Risks
Health of the Consumer
Joint Venture Uncertainty
Financial Condition
HEALTH OF THE CONSUMER

Dependence on U.S. Economy


Not levered to EM or international markets
U.S Economy seen as “fragile”
Food & Beverage Off-Premise v. Personal
Consumption Exp
15000
10000
5000
0
2009 1Q

2010 1Q
Outlook for U.S. Economy

PCE & Off-Premise consumption are flat


3Q
Source: Bureau of Economic Analysis
FY2012 Weaknesses:






Weak consumer not able to trade up to premium
Constellation took pricing on best wine brands
No pricing power
Decreasing volume trends
Increased Marketing Spend
Crown JV sales grew 3%, yet Equity Earnings decreased 6.3%
F&B
3Q
PCE
2011 1Q
3Q
POSSIBLE JV OUTCOMES
Key Dates & Outcomes
 Modelo must give notice by 2013 to terminate
 The current JV agreement expires in 2016
JV does not renew, Modelo imports own brands
2. JV does not renew, Modelo chooses new
importer with more scale
3. JV renews
1.
FINANCIAL CONDITION HIGHLIGHTS

Cash Flows


$500M sustainable
Balance Sheet Quality

High Debt Level




Poor quality



50% of assets
Goodwill/Intangibles
Income Statement


$2.6B on balance sheet
$6B including purchase obligations and leases
Low Times Interest Earned
Reliance on Crown JV for 40% EPS
No Dividend
CREDIT RISK
FY12 Earnings Release
 Target leverage ratio of 3.0-4.0x
 Results
in debt level of $2,000M-$2,650M

$2,600M / $664M = 3.92x projection

New $1,000M share buyback
 Funded
 Could
 Market
through NEW debt issuance
increase leverage ratio
will demand higher interest rate
CORPORATE GOVERNANCE

Private Company Characteristics





Dual-Class share structure
Over 50% of voting rights
11.81% Equity stake
Elect majority of Directors
Strong resistance to changes in class
structure
Source: GMI


AGR:

Aggressive accounting and
governance behavior

Strong Academic Support

Harvard, Wharton, Stanford

Entrenchment decreases performance
Value Destruction

Share repurchases
VALUE DESTRUCTION
EVA under different WACC assumptions
200.00
100.00
0.00
(100.00)
(200.00)
7.18% WACC
EVA (millions) (300.00)
10% WACC
(400.00)
15% WACC
(500.00)
(600.00)
(700.00)
(800.00)
2007


2008
2009
Year
2010
2011
Value destruction at all discount rates
ROIC lags cost of capital
ACQUISITIONS
o
$5B in acquisitions since
February 2001
o
$3.3B of which was
Goodwill/Intangibles
o
$1.25B in write downs &
impairments since 2001
BUILD-UP RATE JUSTIFICATION

Additional Risk Factors
 Private Company Aspect
 Governance Risks
 Company-specific risk


Mid-Range WACC


e.g. JV termination
10.41%
Build-Up WACC

13.97%
18
16
14
Financial Condition
12
JV Risk
10
Corp Gov
8
SMID
6
MRP
4
Risk-Free Rate
2
0
Build-up Cost of Equity
Valuation
Multiple Scenario DCF
Market Multiples
DCF SCENARIOS

11 Scenarios







Base
Worst
Best
Possible Crown JV Impacts
Efficiency Gains
5 & 10 Year Valuations
Sensitivity Analysis


2 Discount Rates
3 EV/EBITDA Terminal Values
1. JV does not renew,
Modelo imports own
brands
2. JV does not renew,
Modelo chooses new
importer with more scale
3. JV renews
Price
Target:
$17
FY 2012 EARNINGS RELEASE
Constellation Brands
Net Sales
$2,654M
EBIT
$769M
EPS
$2.34 (tax benefits)
Tax Rate
17%
Growth
-1.0% growth






FY 2013
 EPS
 FCFE
 Tax Rate
$1.89-2.03
$425-475M forecast
34%
Canisius College “Base Case”
$2,661M
$782M
$1.89
35%
2.25% growth
$2.09, 10% growth
$440M estimate
35%
MARKET MULTIPLES
Median: 9.38
Average: 11.13

P/CF valuation price target of $16

P/E valuation price target of $22




Historical Avg. PE (Restated): 10.5
P/E multiple: 10.5
Projected FY2013 EPS: $2.09
Measures Constellation value as a whole
Does not discount additional risks
SUM OF PARTS

Valuation



Wine
SVEDKA
Crown JV

3 Scenarios

Sensitivity Analysis


2 Discount Rates
Appropriate Scenario


Conservative
Simple Average
Price
Target:
$17
PRICE TARGET
Average sum of the parts valuation
$17
Average of all 11 scenarios
WACC 10.49%, 13.97%
$17.10
P/CF
$15.60
P/E approach
$22
SELL TARGET:
$17
Price on
4/5/2012:
$21.61
21.3%
downside
INVESTMENT SUMMARY

Key Risks




Low growth/mature wine industry
Weakness of U.S. consumer
Corporate governance weakness
Value Destruction



Share buybacks
Crown JV uncertainty
Weak financial condition

Market is inadequately pricing in risks of STZ

SELL Recommendation: Price target of $17
QUESTIONS?
APPENDIX
•Earnings Release (25)
•Price Matrix (26)
•Crown JV graph (27)
•SG&A / 10yr scenarios (28)
•Hispanic graph (29)
•Modeled Growth (30)
•Margins (31-32)
•Diageo (33)
•WACC (34-35)
•Sum of Parts (36-39)
PRICE TARGETS
Scenario
Scenario 4:
EV/EBITDA Scenario 1 Scenario 2 Scenario 3
X: 10yr
10yr ($2B
of 10
(BASE)
(WORST) (BEST)
(NO $2B
CASH)
CASH)
Buildup
Midrange
WACC
$14.54
$19.26
$23.24
$13.06
$17.52
$21.29
$19.08
$24.69
$29.44
$18.33
$26.11
$33.46
$11.37
$18.63
$25.58
Scenario
Scenario 4:
EV/EBITDA Scenario 1 Scenario 2 Scenario 3
X: 10yr
10yr ($2B
of 9
(BASE)
(WORST) (BEST)
(NO $2B
CASH)
CASH)
Buildup
Midrange
WACC
$12.67
$17.03
$20.70
$11.28
$15.40
$18.87
$16.78
$21.94
$26.31
$17.19
$24.49
$31.35
$10.23
$17.01
$23.47
Scenario
Scenario 4:
EV/EBITDA Scenario 1 Scenario 2 Scenario 3
X: 10yr
10yr ($2B
of 8
(BASE)
(WORST) (BEST)
(NO $2B
CASH)
CASH)
Buildup
Midrange
WACC
$10.81
$14.80
$18.17
$9.50
$13.27
$16.45
$14.47
$19.19
$23.18
$16.05
$22.86
$29.25
Average of all Buildup and Midrange scenarios is $17.10
$9.09
$15.38
$21.37
5yr- Crown
Stress
CASH
Tested
NOW
Scenario 3,
SG&A
(BEST)
$22.28
$28.47
$33.72
$19.20
$24.01
$28.03
5yr- Crown
CASH
10 w/
LATER
5yr- Crown 5yr- Crown
CASH
CASH
Average
NOW
LATER
(BEST)
(BASE)
$12.94
$17.37
$33.63
JV con’t.
$13.90
$21.98
$29.71
Stress
10 w/
5yr- Crown 5yr- Crown
Tested
CASH
CASH
Scenario 3,
NOW
LATER
test 1
JV con’t.
$19.72
$25.41
$30.23
$18.46
$23.12
$27.02
$12.20
$16.49
$32.21
$12.76
$20.36
$27.60
5yr- Crown 5yr- Crown
CASH
CASH
10 w/
NOW
LATER
Stress
Tested
Scenario 3,
test 1
(BEST)
$17.16
$22.36
$26.75
$17.72
$22.24
$26.02
(BEST)
$11.47
$15.61
$30.79
JV con’t.
$11.62
$18.73
$25.49
$17.59
$22.07
$25.81
(see excel
tab)
$11.33
$15.78
$15.43
$21.41
$30.45
$28.58
(BASE)
5yr- Crown 5yr- Crown
CASH
CASH
Average
NOW
LATER
(BASE)
$16.97
$21.32
$24.96
(BASE)
$10.71
$14.69
$29.26
(see excel
tab)
$14.45
$19.75
$26.54
5yr- Crown 5yr- Crown
CASH
CASH
Average
NOW
LATER
(BASE)
$16.35
$20.58
$24.11
(BASE)
$10.09
$13.94
$28.06
(see excel
tab)
$13.12
$18.09
$24.51
CROWN JV
POTENTIAL CATALYSTS
EV/EBITD Stress
A of 10 Tested
Scenario
3, SG&A
Buildup
$22.28
Midrange
$28.47
WACC
$33.72
EV/EBITD Stress
A of 9
Tested
Scenario
3, test 1
Buildup
$19.72
Midrange
$25.41
WACC
$30.23
EV/EBITD Stress
A of 8
Tested
Scenario
3, test 1
Buildup
$17.16
Midrange
$22.36
WACC
$26.75
Average
of
Midrange
$25.41
10 w/
JV con’t.
$13.90
$21.98
$29.71
10 w/
JV con’t.
$12.76
$20.36
$27.60
10 w/
JV con’t.
$11.62
$18.73
$25.49
• Margin Expansion
• Through Reduction in SG&A (Project Fusion)
• From 20.5% of Sales to 15% over 5 years
• We feel this type of efficiency is excessive
• Need for increased promo and ad spend
• Due to value proposition
• Crown JV Continuing for another 10 years
• We feel this is unlikely
• Modeled 8% Crown Equity Earnings growth
• BEST Case Scenario:
• 5% Wine growth
• 20% Svedka growth
• 10% Crown JV growth
$20.36
• Price Target $21, SELL
OPPORTUNITY TO GROW CROWN
EARNINGS
• Hispanic population growth is also highly focused in a few
key geographic markets
• Strategic opportunity for Crown Imports
• Increase market share through increased distribution
efforts
• Key states include California, Texas, Florida, New York, and
Illinois.
REVENUE & EPS GROWTH RATES

EPS Growth modeled at 10%

EBIT growth aggressively modeled at 5%

Bucking 5 year negative growth trend
FY12 MARGINS

Gross Margin 40.1%, up 420bp YoY

Operating Margin 20.3%, up 430bp YoY

Upward biased changes due to divestiture of
lower margin European and Australian wine
business
MARGINS
COMPETITION: DIAGE0

Diageo:

U.S. Spirits business driven by flavored Vodkas
“[The U.S.] is showing very good signs of improvement. It’s
not a snapback…Now the U.S. is not going to offer us the
same growth that Brazil can.”

Key takeaway: U.S. does not offer the growth that Emerging
Markets offer

Constellation Brands LACKS EM exposure
 Thus stuck with 90% of sales from a mature U.S. market


Source: WSJ, March 26, 2012
WACC
WACC
SUM OF PARTS
• Target Price of $17 with Conservative Scenario,
using build-up and mid-level discount rates
SUM OF PARTS
• Wine value comes from
“Best Case” scenario
• PV of wine sales only
• SVEDKA purchase price
$384 million, adjusted for
inflation, and multiplied by
4x to represent case vol
growth
• Crown valued as the PV of
forecasted equity
payments
SUM OF PARTS
• Crown value based on
PV of future equity
earnings
• Includes options that
will be exercised
• Based on build-up
method, discount rate
of 13.97%
SUM OF PARTS
• Crown value based
on PV of future
equity earnings
• Includes options
that will be
exercised
• Based on build-up
method, discount
rate of 13.97%
• Conclusion: Using both the build-up and mid-level discount
rates, an average target price of $17 can be obtained,
AFFIRMING SELL RECOMMENDATION
Additional risk Build-up premiums
(1-2% per item)
PV OF GROWTH OPPORTUNITIES

PVGO: The present value of growth opportunities
is a tool to extract the market’s expectations on
future growth potential for Constellation.

Using the CAPM we determined a cost of equity of
10.41% for Constellation.

PVGO for Constellation under current market
conditions is 16.97%.
 Peer median of 46.52%
 Market does not feel that Constellation has
much growth potential.

Given that Constellation has lagged the wine
industry growth rate of 3%, the PVGO is justified,
especially compared to its peers.
Key assumptions:
EPS: 1.79 TTM restated
Price: 423.62 on 1/12/12
WINE IMPORT DATA


Imported wines ≈ 1/3 U.S. wine sales
USD appreciating against the Euro and Aussie Dollar


Floods market with competitively-priced alternatives
This is a negative for Constellation, as the U.S. consumer
is still trending towards value brands
EPS
WINE

STZ








Vincor, Robert Mondavi, Ravenswood, Arbor Mist, and Ruffino
Approximately 90% of sales
Lags the industry growth rate
Sold only 12.7% of the wine cases during 2010
Negative EPS between 2008-2010
Negative organic growth in 2011
Extremely low exposure to emerging markets, leading to lack of revenue growth
Industry:







Smallest segment in the alcoholic beverage industry compared to beer and spirits
3% CAGR on average
Mature and slow growth industry
Large conglomerates, such as STZ
Competitors are E & J Gallo, The Wine Group, Vina Concha y Toro, and Treasury Wine Estates
4-6% CAGR prior to the recession
On-premise v. off-premise sales


Value v. Premium Wine Sales




Larger growth in off-premise sales than on-premise (use graph showing this off Bloomberg)
Trend towards value brands continues
Remains to be seen if producers can successfully persuade consumers to abandon value brands for premium
Franzia Winetaps (The Wine Group), a value wine, has the largest market share of 7.9%
High growth seen in developing markets, but mainly China where CAGRs are in the mid-teens
WINE CRUSH DATA

California’s 2011 wine grape crush, from all varieties, totaled 3,342,689
tons, down 7 percent from 2010


varieties accounted for the largest share of all grapes crushed, at 1,917,132
tons, down 7 percent from 2010. The 2011 white wine varieties crush
totaled 1,425,557 tons, down 7 percent from 2010.


On the price side, record highs were set for both red and white wine grapes


average price for the 2011 crop of red wine grapes was $702.70, up 12
percent from 2010, while the average price for white wine grapes came in at
$541.11, up 8 percent from last year. The 2011 average price of all varieties
reached a record high of $588.96, up 8 percent from 2010 and 3 percent
above the previous record high set in 2009.
ON/OFF PREMISE
SPIRITS

STZ

SVEDKA, Black Velvet, & Paul Mason Brandy





Approximately 10% of sales
Miniscule market share with many global competitors
Lacks brand recognition that competitors have
Growing at double-digit rate


Since acquisition, Svedka is quadrupled in case sizes
Driven mainly by SVEDKA
Industry:


2nd largest market segment of alcoholic beverage industry
Led by vodka and whiskey


Diageo, Brown-Foreman, & Beam Global & Spirits


Smirnoff, Absolut, Grey Goose, & Skyy
Diageo controls the spirits market
Shift towards spirits over wine and beer
BEER

STZ

Crown Imports


JV 43.6% of EPS in 2011




Equity Earnings
No solid commitment from partners beyond 2016
JV between 2008-2010 was the only positive earnings segment for STZ


Corona, Corona Extra, Corona Light, Modelo Especial, Negra Modelo, St. Pauli Girl, Tsingtao, & Victoria
Without which, it would not have been able to cover interest payments
Not a beer company
Industry:


Largest market share compared to wine and spirits
Dominated by major companies


Anheuser-Busch InBev, Miller Coors, Crown Imports,
Growing trend towards Imports and Craft Brews in the US

Double digit growth rate compared to stagnant growth for whole industry



16.4% volume growth compared to -2%; Dollar growth, craft up 17.5% compared to .3% for the industry
Attempt by companies to innovate with new products, such as Bud Light Platinum recently
Strategy: Fast-growing acquisitions by major companies


Ex: SAB Miller’s acquisition of Foster’s
Ex: Major companies acquiring craft breweries
CROWN JV
Company had
negative earnings
HEALTH OF THE CONSUMER
• Personal Income rising, while personal savings
decreasing, yet off premise spend on food/beverage
flat
ACADEMIC SUPPORT

Manager’s protected from the market for corporate control tend to pursue
inefficient investment products


Democratic corporate governance strongly associated with higher relative
returns


Most democratic:
Most dictatorial:


3.8 abnormal
-5%
Gompers, Ishi, Metrick
Firm value increases with the cash-flow rights of the largest shareholder, but
decreases when voting rights exceed cash-flow rights


Journal of Finance August 2007; Masulis, Wang, Xie
Claessens et al.
Found a significant negative relationship between disproportional voting rights
and firm value

Gompers (Harvard), Ishii (Stanford), Metrick (Wharton)
OPPOSITION TO MORE BALANCED
CLASS STRUCTURE
PROPOSAL 5 — STOCKHOLDER PROPOSAL
Mr. Kenneth Steiner of 14 Stoner Avenue, 2M, Great Neck, New York 11021, who has
indicated that he owns 1,100 shares of our stock, has given notice that he or his designee
intends to make the following stockholder proposal at the Meeting. The Board recommends
that you vote AGAINST the stockholder proposal. In accordance with applicable regulations, we
include this stockholder proposal and supporting statement in the form proposed by
Mr. Steiner:
Equal Shareholder Voting
RESOLVED: Shareholders request that our Board take steps to adopt a plan for all of our
company’s outstanding stock to have one-vote per share. This would include all practicable
steps including encouragement and negotiation with family shareholders to request that they
relinquish, for the common good of all shareholders, any preexisting rights, if necessary…
The Board of Directors recommends that you vote AGAINST Proposal 5. Unless you properly
direct otherwise, the shares represented by your proxy, if properly submitted and not revoked,
will be voted AGAINST such proposal.
ADDITIONAL SCENARIOS









Key Assumptions:
Scenario 4 – “10yr No Real Growth & JV Termination”: Base Case, but with termination of JV. AB InBev would increase
their stake in Grupo Modelo, triggering a cash payment of 4x EBIT to Constellation. In 2017, earnings from the Crown
Imports JV will only incorporate 10 months due to the timing of the termination. Equity earnings going forward will be
significantly impacted and no longer material. Constellation would receive a cash payment, estimated at $2 billion,
upon notice being granted for FY2014. The scenario shows the effect of the joint-venture termination by Grupo
Modelo.
Scenario X – “10yr No Real Growth & JV Termination”: Base Case, but with termination of JV. AB InBev would increase
their stake in Grupo Modelo, triggering a cash payment of 4x EBIT to Constellation. In 2017, earnings from the Crown
Imports JV will only incorporate 10 months due to the timing of the termination. Equity earnings going forward will be
significantly impacted and no longer material. Constellation would receive no cash payment. The scenario shows the
effect of the joint-venture termination by Grupo Modelo.
Stress Tested Scenario 3 – “Decreasing SG&A significantly”: Same as Scenario 3, but with SG&A decreasing as a
perfect of sales from 20.5% to 15%. We feel this significant of an efficiency gain would be significant, but drastic, and
unlikely.
5yr Crown Cash Now, Best Case -- Modeled Scenario 3 with a $2 billion cash payment in year 2014.
5yr Crown Cash Later, Best Case -- Modeled Scenario 3 with cash payment of $300 million approximating estimated
50% of BV of the joint venture, upon termination this payment would be received by Constellation.
10yr Model with JV Continuing -- Base case, but assuming 10yr model
5yr Crown Cash Now, Base Case -- Modeled Scenario 1 with a $2 billion cash payment in year 2014.
5yr Crown Cash Later, Base Case -- Modeled Scenario 1 with cash payment of $300 million approximating estimated
50% of BV of the joint venture, upon termination this payment would be received by Constellation.
FINANCIAL CONDITION
CASH CONVERSION CYCLE
ASSET TURNOVER
INVENTORY TURNOVER
FIXED ASSET TURNOVER
DEBT/EQUITY
REVERSE ENGINEERING

Reverse Engineering:

Holding all else equal for Scenario 1:

At WACC of 7.18%, in order to justify price approximating current levels:

A growth rate of 5% in CWNA

A growth rate of 30% in Spirits

A COGS of 56% in all five years

SGA of 17% in all five years

Equity earnings growth rate of 20%

Income tax rate of 19%
70%
60%
50%
40%
30%
20%
10%
0%
Underlying Market
assumptions
Expected Levels
GENERATIONAL SEGMENTS

Total estimated US Population 2011
 312 M

Boomers (2010)
 79 M
Millenials (2010)
 77 M
Generation X (2010)
 51 M


Source: US Census, Pew
Research
Baby Boomers (42-60)
Millenials (18-25)
Generation X (26-41)
Other
SMID PREMIUM


U.S. mid-caps have historically provided only minor diversification
benefits, having a correlation to large caps of more than 0.94 over
the past 10 years. Mid-caps have behaved similarly to U.S. small-cap
equities, exhibiting a correlation of 0.98. The volatility of return on
mid-cap stocks as measured by standard deviation was 18.8%, more
than 3 percentage points greater than that of large caps. One way to
interpret this number is to assume a normal distribution of returns. If
you expect mid-caps to earn an average return of 6% in any given
year, there is at least a 2% chance that the return will be less than
31.6% (two standard deviations less than the average). Viewed in this
light, the 36% drop in 2008 should be viewed as unlikely but not
impossible.
Source: Morningstar
P/S

Common to use P/S valuation for:



New company
Company with accounting issues
Value based on total net Sales
P/S Projected Valuation
Average 2011 P/S
P/S Multiple
0.99
1.30
Projected FY13 Net Sales
2,737.89 2,737.89
Projected FY13 Shares (Diluted)
221
221
Target Price
12.21
16.15
2009-2011 Average
1.02
2,737.89
221
12.68
Standard Deviation of 0.33

Highest target price is $16.15 = CONFIRMS SELL
SEGMENT BASED P/S

Segment P/S



Using projected sales for
each segment & the
2000-2011 average P/S
and the 2011 P/S
Use Crown earnings to
find what investors are
willing to pay for those
earnings because STZ
does not give Crown
Revenue but Crown
earnings
Highest target price:


Based on 2011 P/S
alone, which is above
average, a target price of
$19.16 is obtained
CONFIRMS SELL
As Equity Earnings for Crow n
Summation P/S Projected Valuation
CWNA P/S
CWNA Projected Net Revenue
CWNA Price Target
*Used Projected Shares Above = 221
Crow n Imports P/S
Average 2011 P/S
1.37
1.70
2,673.67 2,673.67
16.60
20.55
16.38
17.82
Crow n Imports Projected Equity Earnings
Crow n Imports Price Target
*Used Projected Shares Above = 221
Svedka P/S
Svedka Projected Revenue
Svedka Price Target
*Used Projected Shares Above = 221
284.37
21.08
284.37
22.93
1.10
268.18
1.34
1.10
268.18
1.34
CWNA Target as % of Earnings (82.87%)
Crow n Imports as % of Earnings (8.81%)
Svedka Target as % of Earnings (8.3%)
Total Target Price
13.76
1.86
0.11
15.72
17.03
2.02
0.11
19.16
P/CF
WINE IMPORT DATA

Imports grew 3.9 percent to 109.8 million cases. account for 32 percent of the volume of wine sold
in the U.S.

As the USD appreciates in value against the Euro
and Aussie Dollar, imported value wines become
cheaper to import, thus flooding the market with
value brands

This is a negative for Constellation, as the U.S.
consumer is still trending towards value brands
CROWN JV POTENTIAL OUTCOMES
1.
2.
3.
Modelo gives notice by 2013 that the JV will
NOT renew after 2016, and Modelo will import
their brands into the U.S.
Modelo does NOT renew JV, chooses different
party (other than STZ) as importer
Modelo renews the JV for another 10 years
BUILD-UP RATE JUSTIFICATION

Significant Governance Risk
 Private Company Aspect
 Company-specific risk

Governance
Discount
SMID discount
MRP
e.g. JV termination
Risk-free
Build-up Cost of Equity
WACC 10.41%
WACC 13.97%
CAPM UNDERSTATES WACC
• CAPM
• Book Weights
WACC 7.18%
• Market Weights
WACC 7.81%
• Effective debt cost
Average 7.42%
BASE CASE SCENARIO

Scenario 1 –
“5yr Base Case”:



CWNA grown at
2.25%/year
Spirits growing
at 10%/year
driven by
SVEDKA sales
Equity earnings,
driven by Crown
Imports, grew
8%/year
WORST CASE SCENARIO

Scenario 2 – “5yr Worst
Case”:

CWNA, Spirits, and Crown
Imports sales grow at an
inflation rate of 2%.

Based on the fact our
“Worst Case” scenario was
a SELL rating, we did not do
further sensitivity testing of
lesser growth rates for wine,
spirits, or Crown segments.
BEST CASE SCENARIO

Scenario 3 – “5yr Best
Case”:



CWNA sales growing at 5%
YoY, which outpaces the
industry average
Spirit Sales driven by
SVEDKA growth at 20%
Equity earnings from
Crown grow at 10% YoY.
SUM OF PARTS

Valuation
 Conservative:
 Possible:
$17
$20
 Unlikely: $24
 Unlikely & Possible: $22
 All:
$20