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Analysts: Constellation Brands a good investment despite disappointing Q3'19

Constellation Brands Inc. disappointed investors after lowering its fiscal 2019 guidance on Jan. 9 but some analysts said the double-digit stock drop was overdone and the alcohol giant remains a good investment.

While analysts generally lowered their price targets for the maker of Corona beer after the earnings announcement, many remained bullish on the company.

"We view the stock price reaction as overblown given already cheap valuation to begin with and our thesis around the sustainability of beer revenue growth remains intact," Morgan Stanley equity analyst Dara Mohsenian said in a Jan. 10 note to clients.

Mohsenian lowered Morgan Stanley's price target for Constellation Brands shares to $207 from $246 but maintained an "overweight" rating on the stock.

Constellation Brand executives blamed the downward revisions in its EPS guidance for the fiscal year on weak sales of wine brands below $11 and a $55 million increase in interest payments after the company's $4 billion investment in Canadian cannabis producer Canopy Growth Corp., which closed Nov. 1. Beer margins, which analysts generally view as one of the company's stronger metrics, also suffered from higher marketing expenses, increased transportation costs and a one-time issue with glass at one of the brewer's bottling plants in Mexico.

Executives have said they are exploring options for the company's lower-priced wine portfolio, including a sale. Wells Fargo Senior Analyst Bonnie Herzog said in Jan. 9 note to clients that the solution could come soon.

"While any sale will likely be EPS dilutive in year one, we think the market is missing the potential accretion in years ahead following the disposal of the underperforming, low margin asset," Herzog said.

Wells Fargo also lowered its price estimate to $235 from $260.

Morningstar equity analyst Sonia Vora said Jan. 9 the firm expects longer-term sales growth to remain at 6% and an average operating margin to remain in the mid-30s as a percentage of sales. The company's share price offers a "compelling entry point for investors," Vora said in a research note.

Optimistic sentiment among analysts was not universal.

Constellation Brands is in line to ship less wine to distributors than distributors send to retailers in the fourth quarter and shipments could trend down further if Constellation does not find a buyer for the cheaper wines dragging on overall sales, SunTrust Robinson Humphrey's William Chappell Jr. said in a Jan. 9 research note.

Constellation Brands also believes Canopy Growth can achieve C$1 billion in annual revenue over the next months and see margins close to that of consumer packaged goods companies. Chappell, however, said there is little clarity on the business and the investment will continue to "hamper" Constellation's valuation through the company's higher leverage and potential downward earnings revisions.

"In our view, the stock has now been tied to Canopy and needs its results to live up to expectations," Chappell said in the note.

Shares in Constellation Brands recovered on Jan. 10 to $159.93 per share, 9% higher than the previous day's closing price of $150.95.