Wall Street Can Toast the Constellation Brands Report

Constellation Brands (NYSE:STZ) reported earnings this morning and initially Wall Street liked what they saw. STZ stock spiked on the headlines but has faded. So now the job for the bulls today is to hold the line so they can build further upside on a strong report.

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Management’s scorecard shows that they easily beat estimates fueled by strong Corona and Modelo beers. The wine sales, on the other hand, were weak but management has already acted to remedy this shortfall.

Maybe it was a sign that they expected drama over the wine weakness this morning, but they broke some pertinent news. Just after the market closed on Wednesday, we learned that Constellation Brands is looking to divest 30 of their lower-priced wine and spirits brands to Gallo for about $1.7 billion.

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Although this was less than what there were seeking for it, this should ease investor concerns about the sales miss this quarter. And this will put a nice pile of cash back onto their balance sheet.

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Coming into the report STZ is up 12% year-to-date, just trailing the S&P 500. So there is some room to give back here but the stock ranges are tight. STZ stock has just finally recovered from their last earnings debacle so they can’t afford another letdown here.

It’s not that they delivered a stinker of a report. Net sales did fall relative to last year, but they did beat the analyst estimates. What’s important is that they improved their bottom line as net income per share sprang almost 40% from a year ago. So clearly management is executing on plans very well.

However, and as is the case in every dip on earnings these days, management committed the cardinal sin of earnings events. They guided lower for the coming quarter. Investors have no tolerance for that these days and that’s almost all that matters to them for the short term.

We often see perfect quarters trigger big selloffs if the guidance is weak. But STZ management is not worried they are merely being cautious in a time when we have so many geopolitical worries still looming. If they were truly worried they wouldn’t raise dividends or continue buybacks. They simply want to under promise and over deliver.

This is a proven management team and they are not afraid to take risks. They were first of the mega-cap companies to invest in the cannabis pot of gold. They dumped $4 billion into Canopy Growth (NYSE:CGC) and risk this size is proof that they can commit to potential when they see it.

Fundamentally, Constellation Brand stock is cheap. It sells at a price-to-earnings ratio of 13x, which is twice as cheap as Anheuser-Busch (NYSE:BUD) or Coke (NYSE:KO). So owning its shares here is not a giant financial risk.

We all know that 2018 ended badly for stocks. Christmas marked the bottom for the most of them and since then we’ve recovered almost all of it. However, STZ did not bottom until Jan. 9. The good news is that since, STZ stock clawed its way up 20% from the abyss. Along the way, the $175 per share zone was important.

Just the same, the zone above this morning’s pop is also important. It is a prior pivot point that dates back two years. So these are resistance on the way back up. So the Constellation stock bulls have work to do. Breaking through $188 area will not be easy but if management can continue to deliver strong results it will be doable.

The weekly chart shows that the STZ stock breaching $177 per share started a rally that has more upside in it so they are on their way. The close today will be important to maintain this momentum. There is nothing to sustain concerns in today’s report so it’s not likely that there will be big sellers here.

There is support below but it needs to hold. Losing the $160 per share zone create a major technical problem for the bulls. While this is not a forecast and definitely not my expectation, it is a realistic scenario that does exist.