Although the S&P 500 is down 5.8% over the past six months, Constellation Brands’s stock price has fallen further to $192.82, losing shareholders 18.4% of their capital. This might have investors contemplating their next move.
Is there a buying opportunity in Constellation Brands, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Constellation Brands Not Exciting?
Even with the cheaper entry price, we're cautious about Constellation Brands. Here are three reasons why you should be careful with STZ and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
The demand for Constellation Brands’s products has generally risen over the last two years but lagged behind the broader sector. On average, the company’s organic sales have grown by 4.1% year on year. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Constellation Brands’s revenue to drop by 6.6%, a decrease from its 5% annualized growth for the past three years. This projection is underwhelming and indicates its products will face some demand challenges.
3. Shrinking Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
Analyzing the trend in its profitability, Constellation Brands’s operating margin decreased by 28.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 3.5%.
Final Judgment
Constellation Brands’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 14× forward P/E (or $192.82 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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