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Krause Fund Research Fall 2018 Consumer Staples November 8, 2018 Analysts

Company Overview Constellation Brands, Inc. (STZ) is an alcoholic beverage company with main operations in the United States, Mexico, Canada, Italy, and New Zealand. Its two primary segments are Beer and Wine & Spirits. It sells various brands of craft and imported beer, including Corona, Modelo and Ballast Point in addition to high-end wine such as Robert Mondavi and Kim Crawford. Spirits in STZ’s portfolio include Svedka, High West Whiskey and Casa Noble. Constellation Brands defines itself as a provider of premium and luxury brand alcoholic beverages.1, 19

Stock Performance Highlights 52-week Range $198.85-$236.62 Beta 0.652 Share Highlights Market Capitalization $38.429b Shares Outstanding 191.31m EPS $10.08 P/E Ratio (TTM) 12.16 Dividend Yield 1.47% Dividend Payout Ratio 20.63% Company Performance Highlights ROA 9.39% ROE 23.92% Operating Margin 27.44% Net Profit Margin 23.16% Financial Ratios Current Ratio 1.79 Debt to Equity 1.55 Total Asset Turnover 0.41

Constellation Brands, Inc. (STZ)

Recommendation: BUY

Current Price: $204.75 Target Price: $241-$246

STZ is Written in the Stars

We recommend a buy rating for Constellation Brands because of the positive outlook on premium alcoholic brands, its defensiveness compared to the market volatility and its investment in the cannabis industry. Drivers of Thesis • Constellation Brands’ presence in craft beers and high-end wine & spirits will only continue to strengthen as consumers’ tastes move to higher quality products. • We forecast its beer net sales to grow approximately 7% in the next 5 years, a main driver of STZ’s bottom line. We project wine & spirits net sales to grow ~5% year-over-year. • STZ is defensive to the market with a beta of 0.652, but it also provides a cushion to a correction in the economy not forecasted in our model. • We believe STZ’s expansion into the cannabis market makes it a positive for the future of the company. Risks of Thesis • Trade tensions and tariffs could negatively affect the growth of STZ due to inflating costs that STZ may not be able to pass onto consumers. • The uncertainty with the cannabis market in the U.S. and lack of legalization of marijuana federally in the U.S. could impose risks in its cannabis investments. One Year Stock Performance

2Source: Yahoo Finance

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

STZ S&P 500

Megan Donahoe Ian Eklin [email protected] [email protected] Shannon Pedersen Zoe Zecchin [email protected] [email protected]

11/1/17 2/1/18 5/1/18 8/1/18 11/1/18

Important disclosures appear on the last page of this report.

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Economic Outlook Gross Domestic Product (GDP) We believe that Constellation Brands will benefit from increases in GDP because consumer spending is an integral part of the GDP equation, meaning that if GDP rises, it can be assumed that consumer spending will increase as well. Fortunately, GDP has grown quarter over quarter for the past few years (2015 Q1 has been the only decrease in GDP growth over the past 5 years), which is a strong indicator of a healthy economy. Currently, third quarter GDP was reported at 3.5% growth Q-o-Q.3 Typically, consumers purchase staple products more in expansionary periods and less in contractionary periods. However, Constellation Brands’ beta is 0.652, meaning it is more of a defensive stock.17 Thus STZ’s product is bought in a strong economy as well as a weakening one with less of the volatility that is associated to the broader market. In the short term, we believe GDP’s growth rate will stabilize to ~3.8%. GDP recently increased significantly in Q2 to 4.2% growth, which leads us to believe that over the short-term GDP will slow relative to the recent jump. Over the next 2-3 years, we forecast GDP to slow in growth from 3.5% to growing at a 3.0% Q-o-Q average. We believe the GDP growth in the last three quarters will not maintain into the next few years, which could impact the consumer staples sector and companies like Constellation Brands. As stated before, downturns in the market (such as a weakening GDP) do not effect STZ as much relative to the market. Inflation Inflation is an important indicator for companies in the consumer staples sector because it measures the value of consumers’ purchasing power. Inflating costs is an important metric to monitor for companies with lower-margin products, such as consumer staple products. Consumers will see the impact more on cheaper products as a price change is more noticeable with these products, and consumers will react accordingly. Rising inflation can cause consumers to spend less in the economy, which can negatively affect Constellation Brands if inflation continues to rise in the future.

5Source: U.S. Bureau of Labor Statistics

Historically, inflation rises and falls based on economic factors and, interestingly, inflation has recently been increasing. The current inflation rate is 2.9%.4 We forecast inflation to decrease to 2.5% in the near future. As the Fed continues to address interest rate changes, rising interest rates will also affect the federal funds rate as they try to maintain a lower target of inflation. In the long-term, we predict inflation to be 2% in the “steady state”. Our reasoning is due to the 2% target the Federal Reserve aims to have in the economy. If our predictions of inflation hold true, the consumer staples sector will be affected positively giving more purchasing power to consumers and incentive to spend in the economy. However, if our predictions prove wrong, it could negatively affect the sector and STZ as companies will have a hard time passing rising costs onto consumers with already low price products. Unemployment Rate & Wages

3Source: Econoday The unemployment rate is critical to examine as an indicator of economic health and directly goes hand in hand with wages. Historically, wages fluctuate more than unemployment rates depending on the economic cycle. Currently, as unemployment is at all-time lows, there is pressure on wage growth, potentially inflating prices even further. As more and more jobs become available, wages become competitive and increase, allowing employees with more money to spend in the economy but also negatively affecting prices of products. As the unemployment rate continues to fall to a nearly 50-year low of 3.7%6, we believe this will positively affect Constellation Brands, as it is an indicator of the overall economy. More specifically, our research team believes with more employment, there is more money in circulation, which means more money for STZ’s products. The unemployment rate rises after an economic downturn and falls after an economic boom. Another metric we are closely following is wage growth. Similar to employment, if wages are increasing there will be more money in the economy, and consumers are able to


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buy higher quality brand names, like Constellation Brands. However, if wages are decreasing, consumers may switch to generic brands for staple products.7 Because the jobless reports have shown unemployment to be steadily declining, we believe the unemployment rate will be 3.8% in the next 6-12 months. We believe there won’t be significant deviations from the current rates, as companies are consistently growing and our forecast of the broader economy is to strengthen. With that being said, based on historical levels, we believe the unemployment rate in the next 3-5 years will rise slightly to 4%. We don’t foresee the number to climb much higher as we recently had a correction in October 2018, and unemployment still fell from 3.9% to 3.8%. However, the lowest ever unemployment may not stay consistently low in the long-term as geopolitical events such as tariffs and trade tensions, along with wage growth, may cause the rate to fluctuate in the future. Even with a 4% rate predicted in the future, it can still help companies and the consumer staples sector as people will have more money to spend on more profitable products available. Consumer Price Index (CPI) The CPI is a measure of various products’ price changes purchased by customers. The CPI is a good representation of consumers’ rate of inflation.3 CPI is an important measure for consumer staple companies because it provides an indication of how prices are affecting the market and what consumers are willing to pay. Consumer staple products are significantly impacted when prices are too high for consumers. We predict that CPI in the short term will remain at 0.1% increases, meaning there should be no significant adverse impact to the consumer staples sector in the near future. In the next 3-5 years, we believe CPI will have a growth rate of 0.2% monthly, which is consistent with the findings of our research on CPI historically. Growth in CPI is consistent with prices increasing in the future due to rising inflation.

3Source: Econoday

Consumer Confidence Survey In addition to examining how consumers currently feel about prices in the economy, we also examined the consumer confidence survey. This survey is an indicator of consumers’ perception of the economy and their attitudes on the current business climate. It is important to analyze consumer confidence for consumer staple companies because if consumer confidence is high, there will be more money in circulation as consumers spend more. Specifically, for Constellation Brands, increased consumer confidence could mean that people are able to buy more expensive products or brands rather than generic brands. If consumers feel confident in the overall economy they feel their dollar increases in value, and they will be able to rationalize a more expensive brand purchase. We believe in the next few years, consumer confidence will continue to rise to align with our positive economic outlook. As of October 2018, consumer confidence is currently at 137.5. We believe that consumer confidence will continue to rise to 139.2 because of wage growth and unemployment decline to fuel this increase. 3 Geopolitical Impacts: Tariffs and Trade Current trade tensions and tariff implementations from President Trump will impact consumer staples and Constellation Brands. Prices will rise for many inputs such as soybeans, corn, and aluminum, and these increased prices will most likely be put on consumers. However, if prices increase too high and consumers aren’t willing to pay, companies may have to absorb these costs. This principle is especially important for STZ because the premium brands it carries also has a premium on cost as well. Analyzing tariffs is important because it could drastically affect companies like Constellation Brands that use aluminum for bottling its products. Historically, the U.S. has not seen this level of constriction in trade. Typically, there are no variances in trade and tariff disputes that cause day to day market fluctuations; however, we see fluctuations due to uncertainty in the outcome of the trade agreements and additional tariffs. In the next 6-12 months, we think the markets will continue to react to rising input prices for companies such as Constellation Brands. The economy could see further fluctuation and negative returns for companies directly affected by the tariffs if agreements aren’t made with China, or if trade tensions escalate further.

Industry Analysis Within the beverage industry, Constellation Brands falls in the alcoholic beverages sub-industry. The alcoholic beverages sub-industry stands to reason given STZ’s vast portfolio of beer, wine & spirts products. Competitive Climate As we will discuss in the following section, beverage companies are expanding globally to gain more market


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share. Having an international presence is a competitive advantage because more countries have a growing middle class. Specifically, Asia has more disposable income available for firms to gain market share. A competitive risk for this industry is rising costs which will hurt company profit margins. Analyzing the competitive environment within the beverage industry informs investors of the best types of firms within the industry. Late-stage firms are best positioned because they will see the most growth opportunities. Consumers’ needs are constantly evolving, so a firm that is well positioned in the industry will have an advantage over a non-established company. Additionally, late-stage firms have less volatility in regards to commodity prices, therefore they can have more stable and higher profits.8

Porter’s Five Forces Threat of New Entrants Beer: Low, Wine & Spirits: Low, Cannabis: High According to our research, we found that the threat of new entrants is low in the wine industry, low in the beer industry and high in the emerging cannabis industry. For beer, threat of new entry is low because barriers to entry are high. The capital requirements and economies of scale at play in the industry make it essentially impossible for a new brewer to enter the market and immediately disrupt the industry. For example, it is estimated that in order to compete on a national level, the initial investment would be in excess of $250 million.10 For wine and spirits, the threat of new entrants is low for much of the same reasons as beer. The economies of scale that current wineries and distilleries have with the initial capital requirements make it very difficult for a new company to enter the market.11, 12

The cannabis market has a significant threat in the form of new players in the industry which is a concern for STZ’s major investment in Canopy Growth. The reason we see a high threat is due to the lack of established markets in developed countries, except for Canada. However, there is already a long list of participants eager for market share. For example, there are already 10 companies, of which several are publicly traded with market caps of over $200 million.13

Bargaining Power of Buyers Beer: High, Wine & Spirits: High, Cannabis: High Beer has more bargaining power for its buyers. Per our research, we found that there are over 2,500 distributors who are the main buyers of the beer and distribute the beer to over 530,000 retail clients. With this low number of distributors, it makes competition in the beer market very limiting to a firms’ profit margin. Distributors are

increasingly consolidating their power and limiting that of competitors. This is a negative for STZ.10

In the wine and spirits market, change cost is minimal, meaning more customers are switching products. Specific to the wine industry, there have been several years with favorable conditions of grapes, so there is an oversupply of wine. Thus, the bargaining power of buyers is high because consumers have more options to choose from and more firms competing for the market. This is a negative for STZ.11, 12 The bargaining power of buyers in the cannabis market is high due to the wide variety of available products that are offered, which is a hindrance for STZ. Some of the products include buds, tinctures, oils and drinks to name a few. Thus, consumers have the option to choose among different products depending on their preferences.13

Bargaining Power of Suppliers Beer: High, Wine & Spirits: Low For raw materials needed in the production of beer, we analyzed water, corn, yeast, hops, barley and aluminum. For the supply of raw material inputs, there is higher risk of availability due to tariffs on certain inputs. We believe the tariffs on aluminum and corn could cause a significant adverse impact on profits if they are unable to pass on the rising costs to consumers. In addition to the tariffs on certain inputs, there is an increase in the prices of other inputs due to inflation, which poses a risk to STZ’s bottom line.10

Wine and spirits have a low level of bargaining power assigned to their suppliers, which has a positive impact on Constellation Brands. The bargaining power for suppliers is low because there are more buyers than there are suppliers in the wine and spirits space thus causing prices to be determined by the purchasers, STZ.11, 12 Threat of Substitutes Beer: Low, Wine & Spirits: Low, Cannabis: Low We found that there is a lower threat of substitutes in the beer space because sales of beer are increasing relative to the wine and spirits industry. This holds true as evidenced in STZ’s recent financials that sales of wine are shrinking while spirits and beer are increasing.10

Following our analysis of beer, we found that more of the wine market is going towards beer and spirits. A positive for STZ is its diversification across the alcohol industry. Consequently, if any of their three lines have cannibalization, STZ will not lose money because consumers will move among the three. In the end, we determined that the threat of substitutes for wine and spirits is low due to its diversification in alcoholic beverages.11, 12


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Cannabis has a low threat of substitutes because of the lack of legal alternatives to cannabis. Recently opioids have risen in popularity, but we believe that cannabis is a stronger market due to its legalization in states. No other drug has a stronger following for legalization, which makes us believe cannabis has a lower threat of substitute.13 Competitive Rivalry Beer: Low, Wine & Spirits: Low We assessed a low competitive rivalry within the beer industry because there is brand loyalty and customers are not changing their brand preferences. In addition, much of the beer industry is not price driven, thus it reinforces that it is based on consumers and their preferences. Another major aspect is concentration effects which are the degree that the top beer producers have of the market. The amount for the top 5 beer producers is more than 75%. This shows that much of the beer industry is driven by only a few companies, making it harder for smaller beer companies to enter the market.10 Wine and spirits have a low degree of competitive rivalry which makes it a positive to Constellation Brands. Wine and spirits have a low competitive rivalry environment because the top 5 wineries have over two thirds of the entire market while the top 5 in the spirits industry have almost sixty percent. Thus, most of the market is already determined and there is concentration among the biggest suppliers that is difficult to overcome.11 ,12

Industry Trends Expansions into Global Markets Companies in the beverage industry are entering into more acquisitions with an international presence. Specifically, Coca-Cola recently acquired Costa Coffee in the U.K.14

Constellation Brands is growing its operations in Mexico to further grow its position in Mexican beer. Many other alcoholic beverage companies like Heineken and Diageo are global companies that have market share reaching across the world. In conclusion, the beverage industry is growing by reaching into more global markets. Growing Cannabis Popularity A growing number of millennials prefer marijuana over alcohol.16 Companies like Constellation Brands are investing in cannabis products and drinks due to the rising popularity and push to legalizing marijuana in numerous states. Constellation Brands invested $4 billion USD in a Canadian cannabis company called Canopy Growth. The investment was approved recently, increasing STZ’s ownership in the company and reaching into the cannabis market.15 Coca-Cola was in discussion with analysts earlier this year about entering the cannabis drink market, which

shows potential for companies to grow into this space. Although it recently backed out of this discussion, a major company like Coca-Cola is promising for cannabis in the future. Increase in Premium Product Consumption Another industry trend we identified was the growing demand for higher quality and premium brand products. In the alcoholic beverage industry, consumers are increasing their consumption of craft beers, imports, and ciders, while domestic beers have dropped in popularity recently.16 In addition, consumers are choosing to spend more money on alcoholic beverages for higher quality, which directly aligns with Constellation Brands’ strategy. This trend towards higher quality products, including alcohol, will positively impact STZ in the coming years.16

Industry Outlook Summary Due to the rising popularity of high-quality beer, such as craft beer and cannabis products, we believe Constellation Brands is well positioned in the industry and will be a key leader in the U.S. cannabis market in the future. STZ will benefit in the industry from its large investment in Canopy Growth and strong market position in the high-end craft beer space. Company Analysis Corporate Strategy & Overview STZ’s main strategy is organically growing through expanding its distribution and strengthening relationships with its distributors. The company hopes to grow through innovation, new products, and growing more operations in Mexico, a trend in the industry. Constellation Brands wants to create industry growth and be known for premium brands. Its product lines are beer, wine, and spirits.17

Revenue Streams

17Source: Bloomberg

0

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4,000

6,000

8,000

10,000

Revenue for STZ (in millions)


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We believe Constellation Brands is in the growth stage of the company’s life cycle because it has increasing sales, as shown in the chart above. We forecasted net sales (revenue) to continue to grow for the next 5 years following the sales growth trend from the past 5 years. Although its costs of goods sold are high (nearly 40%), the industry also has high costs since the businesses are lower margin. However, historically Constellation Brands had higher gross margins than much of the sector due to its ability to charge more for its premium products. In conclusion, STZ has a strong position to grow its revenues in the future.

19Source: Thomson One Specifically, 61% of Constellation Brands’ revenues are from selling beer, while 39% of its revenues come from wine and spirits sales. The Corona brand is the most popular selling product it currently has. Its revenues increased 3.5% in FY2018, and it reported first quarter earnings ending May 2018 (FY2019) with an increase in revenues over the previous quarter of 15.9%.19 This large increase in revenues is promising for the company’s future. In addition, a trend with STZ’s earnings is cyclicality due to seasonality with beer being more popular in the hot summer months, leading to less earnings in the winter months (Q4).17 This trend could also be attributed to New Year’s resolutions with consumers trying to drink less alcohol and being healthier in Q4. Competitive Environment Constellation Brands distinguishes itself from competitors by demonstrating its brand as a premium alcoholic beverage company. Its main competitors are Brown-Forman Corporation, Boston Beer Company, Molson Coors Brewing Co, Anheuser-Busch, and Diageo. Additionally, as stated in the 10-K, it also distinguishes itself through expanding distribution with its wholesalers and retailers, investing in its brand, customer-led innovation, and expanding and improving production.18 Specifically, STZ is investing into expansion of its production capacity in Mexico with its “Mexico Beer Expansion Projects”.18 STZ is effectively increasing its market share to grow in production. It is important for companies in this industry to adapt with consumers’ wants, and STZ is effectively understanding how to innovate further with investments in

the cannabis market. For example, Coca-Cola was eyeing the cannabis-infused drink market, which would be one of the first non-alcoholic beverage companies to enter this specific market. As marijuana becomes legal in more states across the U.S., more companies may reach into the cannabis drink market. Peer Comparisons

17Source: Bloomberg Compared to STZ’s competitors, its earnings per share (EPS) has recently spiked and has historically outperformed its competitors. EPS is a measure we examined when analyzing STZ as a leader in the industry. Although these companies all have varying sizes and shares outstanding, we believe EPS is one indicator of how effective a company can grow its earnings in relation to its shares, therefore showing a better return on investment for investors.

17Source: Bloomberg

61%39%

Beer

Wine&Spirits

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

EPS

Brown-Forman Corp (BF/B US)

Constellation Brands Inc (STZ US)

Molson Coors Brewing Co (TAP US)

Boston Beer Company Inc (SAM US)

Anheuser-Busch InBev SA/NV (BUD US)

0

500

1000

1500

2000

12/31/2014 12/31/2015 12/31/2016 12/31/2017 06/30/2018

Free Cash FlowBrown-Forman Corp (BF/B US)

Constellation Brands Inc (STZ US)

Molson Coors Brewing Co (TAP US)


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Another comparison that we found important in analyzing STZ to its competitors was Free Cash Flow (FCF). We believe a company with strong free cash flow will outperform its peers due to the ability to then invest further into their company by reducing debt, paying dividends, or externally investing with acquisitions. Constellation Brands had stronger free cash flows than its main competitors which makes us believe the company has room to grow in the future as generating FCF is key to a successful company.

Company ROA ROE Op. Margin Constellation Brands 9.39% 23.92% 27.44% Boston Beer Company 11.08% 22.46% 11.79% Molson Coors Brewing Co 3.27% 12.33% 14.65% Anheuser-Busch InBev 4.59% 11.54% 31.84% Brown-Forman Corp 13.42% 53.01% 32.06%

2Source: Yahoo Finance Based on the peer comparison of key company performance metrics, Constellation Brands is in a neutral position compared to its competition. In this table, we used our calculation of STZ’s metrics from our model against comparable firms’ metrics from Yahoo Finance. STZ is in a position to profit with a high operating margin in FY2018, and the company will provide a high return to its shareholders due to its high return on equity (ROE). Additionally, compared to Coors and Busch, Constellation Brands has a higher return on assets (ROA) that is more in line with Boston Beer Company and Brown-Forman, who are bigger competitors in the higher-end beer industry.

Company 2015 2016 2017 Constellation Brands Total Beer Sales 3,189 3,623 4,229 Total Wine & Spirits Sales 2,839 2,926 3,102

Molson Coors Total Beer Sales 3,568 4,885 11,003

Brown-Forman Total Wine & Spirits Sales 4,096 4,011 2,994 Boston Beer Company Total Beer Sales 960 906 863

20Source: FactSet We also analyzed STZ’s segment sales in beer and wine & spirits to some of its main competitors in the U.S. All numbers in the table above are in USD and in millions.

After looking at STZ’s recent growth trend in wine & spirits segment sales, it surprisingly outperformed its competition, Brown-Forman, in 2017. STZ’s beer sales are also continuing to increase, however, not as drastically as Coors. We believe Constellation Brands will see increased sales in its beer, however, in FY2019 due to rising popularity in its high-quality craft beer products. Catalysts for Growth Constellation Brands is a progressive company that realizes the benefits of changing with consumers’ tastes. In order for the company to fully capitalize on its growth for the future, we examined the alcoholic beverage industry and outside factors that influence it. We believe one of Constellation Brands’ largest catalysts for growth is investment in the cannabis market. In August 2018, STZ said it would increase its interest in Canopy Growth, a medical marijuana company, by acquiring $4 billion worth in shares, which recently was approved in November 2018.15 While other companies consider the cannabis-drink market, STZ will also need to further analyze this market for an opportunity to grow and adapt to consumers’ changing tastes. Marijuana is becoming more popular among the younger population and some are moving from alcoholic beverages to cannabis products in legal states. Constellation Brands is able to strongly position itself in the alcoholic beverage market with a new initiative called the “Mexico Beer Expansion Projects”.18 This project is in response to the company’s growth and popularity of Mexican beer in the U.S., and will expand its production capacity in Mexico. As mentioned above, an industry trend is growing with an international presence. This new initiative of Mexican beer growth is effectively widening STZ’s market position. Therefore, we believe a catalyst for growth for STZ is its ability to further expand globally. Compared to its competitors, Constellation Brands could find more growth in its production for cider and hard seltzer products, a growing area within the industry and among the younger audiences. Many consumers are looking for more mainstream options when drinking alcohol and want to consume less calories. We believe with STZ’s strong free cash flows it has room to grow into this area, further expanding its premium alcoholic portfolio. Because of this potential expansion into other products, we believe Constellation Brands has the potential to grow more organically. The company has recently acquired many companies, disallowing for its own operations to focus on growing internally, which is the best source for growth. As acquisitions are excellent sources of diversifying its business and gaining more market capitalization, the company can now focus on growing internally by boosting sales through introducing new products, such as cannabis, cider, and hard seltzer drinks.


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Historical M&A Activity

M&A Date Strategic Contribution

Beer Funky

Buddha Aug-

17 Portfolio of high-quality craft beers

Obregon Brewery

Dec-16 Brewery capacity to support our growth

Ballast Point

Dec-15

High-end segment of the U.S. beer market

JV with Owens-Illinois

Dec-14 Acquisition of glass production plant

Imported beer

business

Jun-13 Rights to import, market and sell Corona

Wine and Spirits

Schrader Cellars

Jun-17

Strengthened position in fine wine category

Canadian Divestiture

Dec-16

Divestiture of the Canadian wine business

Charles Smith

Oct-16 High-quality ultra-premium wine brands

High West acquisition

Oct-16 High-end craft whiskeys and other spirits

Prisoner acquisition

Apr-16

Higher-margin, super-luxury wine brands

18Source: Constellation Brands 10-K 2018 Strengths One of Constellation Brands’ positives is its strong growth in its beer segment from Mexican beer and increasing sales in the U.S. region. Additionally, the company holds a strong position in the market with a leading position in the alcoholic beverages industry. The company has expanded production capacity and distributes to wholesalers in the U.S. The company also has a diversified network of wineries and breweries across the country and world to better help with its distribution capabilities.21

Weaknesses Constellation Brands’ largest weakness is the company’s lack of geographic coverage. The company’s operations are mainly in the U.S. with 96.6% of its revenues from the U.S. This could be a weakness as a lack of diversification in geography could negatively impact the company. The reliance on one country for economic stability is risky due to the economic impact on input costs, laws related to alcohol sales, and agricultural impacts. However, this could also be a strength for STZ as they can diminish the effects of failing economies by having most operations in a strong economy. The concentration of operations mainly in the U.S. can be positive as they have a stronger market presence.21

Opportunities Constellation Brands has many opportunities to grow inorganically within the industry. The company can continue to grow from other alcohol beverage acquisitions, which has been successful historically. The company acquired Copper & Kings American Brandy Co, which further expanded the company’s presence in the U.S. and allowed Constellation Brands’ to grow beyond its large beer presence. The company also acquired a stake in The Real McCoy Rum Company, which continues to expand the company’s customer base to a wider audience of hard alcohol consumers. In 2017, it acquired Funky Buddha Brewer, which makes high-end craft beers and acquired Schrader Cellars, which makes fine wine. Both acquisitions opened the company’s market position to more high-end beer and wine and expanded its brand awareness to a new customer base.21

An additional opportunity for Constellation Brands can arise from the growing demand for beer and cider (especially gluten-free beer). The beer and cider market is expected to grow 5.6% during 2016-2021. The company is in a superior position to grow and reach a wider audience by focusing on growing with new flavors and products. For example, SVEDKA brand launched a Spiked Premium Seltzer beverage. Growing its products to appeal to a wider audience is an excellent opportunity to expand Constellation Brands’ market share in the industry.19

Threats The alcoholic beverage industry is an increasingly competitive market. If Constellation Brands cannot keep its customer base and product quality, the competitive nature of the industry could negatively affect the company’s sales. One of the company’s threats includes raw material risk. The costs of raw materials are rising (including wheat, barley, sugar cane, cans / aluminum) due to inflation. The increasing costs of these materials could impact the company and its operations negatively. Another threat to Constellation Brands is the large impact of governmental regulations on alcoholic content, distribution, advertisements and tax rates. The laws surrounding alcohol is an issue the company faces and will continue to face in the future. These complex guidelines could cost the company more money than expected or could incur additional liabilities.21

Valuation Revenue Decomposition For STZ’s revenue growth, we decided to grow net sales at an average of ~7% Y-o-Y and grow the unit cases sold in beer and wine & spirits at 2.5% and 1.5%, respectively. In addition, we increased the growth in revenue per case and wine & spirits by 5% and 4%, respectively. The main


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drivers of these assumptions follow our trend analysis conducted on the recent growth in beer and wine & spirits. Additionally, we used our analysis of how much of the cost in rising prices STZ would be allowed to pass onto its consumers to maintain sales. When finding the average growth in cases sold for beer we came to a +5% growth rate which we thought was too aggressive. We thought that the +5% growth in beer was aggressive because the growth in revenue per case was decreasing relative to prior years. However, since the revenue per case of beer was increasing, we grew this rate at 5% and decreased the rate 50 basis points each year before leveling off in 2021. Our thought process on decreasing the growth rate was due to how the company is in a growth cycle and the exponential growth will begin to decrease going forward. When applying the same average to wine & spirits growth in unit cases, we arrived at -3% which didn’t fall in line with much of the data we had seen for the future. In addition, the main driver for the decrease in wine & spirit unit case growth came from a year of poor sales in 2018. Thus, we eliminated the 2018 sales from our calculation of the average and came to ~1.5% growth in cases sold for wine and spirits, which we thought was appropriate for the forecasted horizon. We then calculated that the revenue growth per case of wine & spirits came to 4%, decreasing by 1% Y-O-Y before leveling off at 2% in 2021. We believe that the forecasted growth amounts are justified because, as mentioned with the beer segment, in the long term we do not see STZ being able to pass on higher costs to its consumers nor increasing its efficiency past a certain level. Continuing Value (CV) Growth For our CV growth, we estimated 2% based on several factors. First, we believe the growth of the company relies on the growth of the overall economy since this sector tends to move with the economic state and consumers’ wants. Thus, we looked at our forecast for GDP and determined that since our beta was ~0.5 of the market that we could assign half of the market (GDP) increases to STZ, resulting in 2%. Next, when looking at inflation we thought that it would be appropriate to simply assign the same increase rate that we would see in all of STZ products. Finally, given our CPI forecast of .2% growth monthly which equals 2.4% annually, a 2% growth rate also falls in line. We understand that STZ cannot grow more than GDP growth, and we determined that consumer staple companies typically don’t have aggressive forecasted growth, given the nature of the companies in the sector. Cost of Goods Sold (COGS) We forecasted COGS as a percentage of sales. We used 40% of sales in the first forecasted year due to STZ’s products being lower margin and much of the costs coming from the products themselves. In the 10-K, the company states that they plan to pass on rising costs to consumers by increasing the selling prices of their products if growth in cases sold

continues to struggle.18 Although it is uncertain if STZ can pass along the rising prices to consumers and maintain sales, we made the assumption that the company will be able to pass some of the costs onto the consumers and will be able to streamline its production due to its acquisitions and synergies. In other words, STZ will experience economies of scale in which it will be able to generate more revenue on the products while decreasing the costs of those products throughout time. Therefore, we assumed STZ will be able to lower its COGS as a percentage of sales slightly throughout the next 5 years. Capital Expenditures Based on management guidance in the 2018 10-K, capital expenditures for its main expansion project are estimated to increase in FY2019 to $1.15 billion USD, which is included in our model’s capital expenditures amount.18 After FY2019 we decided to be slightly more conservative than the historical growth of capital expenditures. We based most of our assumptions on the beer segment’s capital expenditure requirements for the “Mexico Beer Expansion Project”, which is expected to be completed in the next 5 years.18 We believe Constellation Brands will grow production capacity at 2% well into the future, so increasing capital expenditures are needed to support this internal growth. In its 10-K, the company had increased capital expenditures in FY2018 compared to FY2017, which also leads us to believe it will continue this trend well into the future.18 In conclusion, we used the guidance from management on its expansion project and expected future growth of the company to come to our capital expenditure forecasts. Weighted Average Cost of Capital (WACC) We used WACC as the discount rate applied to cash flows to the firm for our Discounted Cash Flow and Economic Profit models. To calculate the WACC, we multiplied our weight of equity times the cost of equity, and the weight of debt times the after-tax cost of debt. Cost of Debt We determined pre-tax cost of debt for STZ by examining its debt rating of BBB and using a default spread of 1.27% which was added to our risk-free rate.22 The risk-free rate we used was the 10-year U.S. treasury rate, which as of November 8th was 3.24%.17 We then applied the marginal tax rate for the FY2019 of 21%.18 The final after-tax cost of debt calculated was 3.56%. Cost of Equity To reach our cost of equity for our valuation models, we calculated it using the Capital Asset Pricing Model (CAPM). For the CAPM, we used a raw beta of 0.652 found from Bloomberg, using a historical analysis on the company’s 5-year weekly beta.17 Our equity risk premium was found from Damodaran, a professor from New York University who calculates the equity risk premium each


10

month. Our 5.23% risk premium used in our calculation of CAPM is from his observance as of November 1, 2018.23 For the risk-free rate in the CAPM, we used the 10-year U.S. treasury rate of 3.24%.17 Following the CAPM formula, we arrived at a cost of equity of 6.71%. Valuation Models As part of our analysis, we gathered the information and calculations mentioned above to make a Discounted Cash Flow (DCF) model, Economic Profit (EP) model, and Discounted Dividend Model (DDM). We also used relative valuation to compare Constellation Brands to other companies in the beverage industry. We mainly utilized our DCF model as the basis for our target price of $244.29. Discounted Cash Flow & Economic Profit Models For our DCF and EP models, we used a CV NOPLAT growth rate of 2%. We had our CV year be 5 years from today, in 2023, because we believe the firm will reach a steady state at that point. We grew our NOPLAT in the CV year and brought it back to the present value. In addition, we discounted the cash flows for the next 4 years to the present value to reach our total present value, or the value of operating assets. We added back and subtracted non-operating assets and liabilities to arrive at our value of equity. Finally, we divided the value of equity by the FY2018 year-end shares outstanding to arrive at our intrinsic value of the firm. When using the partial-year adjusted price, our final DCF and EP price is 244.29, which was utilized in our determination for the target price range. Discounted Dividend Model (DDM) In our DDM, our partial-year adjusted price of $200.78 was much lower than our DCF price. Therefore, we did not use our DDM in our target price since it was much lower and the dividends forecasted had a lack of management guidance. Due to the little information on future dividend payouts, we decided that this model isn’t the best measurement of future firm success. Therefore, we believe the DDM price isn’t completely representative of the value of the firm. Relative Valuation As part of our relative valuation, we compared Constellation Brands to other beverage companies with a similar market cap, including its direct competitors in the beer and wine industry. We used analysts’ forecasts for EPS and the P/E ratio to gather assumptions of where STZ stands in relation to its competitors. We determined, however, that our relative valuation is not the best metric to use for determining STZ’s intrinsic value. However, it gives us a general idea of where the alcoholic beverage industry is in relation to its competition and still justifies our rating, as it is slightly more than the current price. Our final relative value for STZ came to be $210.01.

Company EPS 2019E P/E 19

Diageo plc $6.74 20.74

Brown-Forman Corporation $1.71 27.01

Boston Beer Company $8.69 32.14

Anheuser-Busch InBev $4.99 16.48

Molson Coors Brewing Co $5.03 11.80

Monster Beverage Corp. $1.98 26.27

Constellation Brands, Inc. $9.37 21.80

2Sources: Yahoo Finance Sensitivity Analysis We created data tables to analyze Constellation Brands further and provide context for changes in STZ’s price and valuation based on changes in our variables. WACC to Beer Case Growth and Wine & Spirits Case Growth We conducted a sensitivity analysis data table for the WACC to the drivers of Constellation Brands’ income: its beer and wine & spirits case growth. We believe that this is an important metric to consider for our model because WACC is the driver of our discounting rate, and the beer and wine & spirits case growths are the drivers of the firm’s revenues. As shown in the table, even a 25 basis point increase in beer or wine case growth results in a positive $2-$4 change in our model’s target DCF price. Additionally, a 25 basis point increase in WACC results in a $20 decrease in our intrinsic price. Thus, with these two factors as main drivers of the company’s share price, it is important to analyze how they can affect our target price and overall recommendation of the firm. Continuing Value (CV) ROIC to CV Growth Rate We also tested our continuing value ROIC to the continuing value growth rate. We believe that these variables are important for the model because the continuing value ROIC measures the return on invested capital of shareholders in the “steady state” 5+ years away. We decided to compare CV ROIC to the CV growth rate because it is the rate at which Constellation Brands will continue to grow in the “steady state”, thus, driving our share price. With only a 10 basis point increase in CV growth rate, we see an increase of $6 to the intrinsic price. Alternatively, when decreasing the CV ROIC percentage by 200 basis points, our price decreases by $4. However, as the CV ROIC rate continues to decrease, it has a more drastic impact on our price.


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Risk-Free Rate to Beta Following our analysis of WACC, we thought it would be important to identify variables that may cause the firm-wide cost of capital to deviate. The two variables we decided to test were the risk-free rate and the beta of the firm. The risk-free rate has broader implications with the firm and the interest rate environment regarding its cost of borrowing, making this analysis more important. As shown in the tables, beta has a significant influence on the intrinsic value of the firm. With a 0.05 increase to STZ’s beta, the price decreases by $15, which is a main driver of our WACC, thus our DCF / EP target price. As stated above, we believe that the beta we found from Bloomberg of 0.652 is representative of the firm’s current market position, but has the potential to increase or decrease given its recent business line developments.17 The risk-free rate did not impact the target price as significantly as beta but still caused small deviances in price. Although risk-free rate and beta aren’t factors that the firm can control, we believe it is still important to analyze how rates move as they can impact the final price. Pre-Tax Cost of Debt to the Marginal Tax Rate We examined pre-tax cost of debt and the relationship to the marginal tax rate because any change in the tax rate will have a significant impact on income, WACC and pre-tax cost of debt. The company’s cost of debt in the WACC will be affected by the company’s tax rate, which was drastically changed last year (FY2018) from the newly enacted Tax Reform. We wanted to see the effect on our DCF price from the effects of the marginal tax rate changing in relation to the effect it would have on cost of debt, which has a tax shield component. With a 2% increase in the marginal tax rate, the price decreases $4. On the other hand, with a 50 basis point increase in the pre-tax cost of debt, we see a decrease of $7 to our intrinsic price. Capital Expenditures to Cost of Goods Sold (COGS) We created a sensitivity analysis for capital expenditures as a test of how these expenditures that measure the growth of the company’s operations can affect our final price. We also tested COGS as an expenditure that can also affect our price due to its impact on our income, therefore NOPLAT, which is used in our DCF / EP calculation. In the data table, a 0.5 basis point decrease in COGS growth results in an increase to our DCF price of $5. On the other hand, a $25 million decrease in capital expenditures results in a $2 increase in our intrinsic price. In conclusion, the less expenditures the company has for capital and goods sold, the higher the intrinsic value.


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References 1 Portfolio - Beer, Wine and Spirits. (n.d.). Retrieved from https://www.cbrands.com/brands 2 STZ : Summary for Constellation Brands, Inc. (n.d.). Retrieved from https://finance.yahoo.com/quote/STZ?p=STZ&.tsrc=fin-srch 3 Econoday Inc. (n.d.). Retrieved from https://us.econoday.com 4 United States Economy at a Glance. (n.d.). Retrieved from https://www.bls.gov/eag/eag.us.htm 5 United States Inflation Rate | 1914-2018 | Data | Chart | Calendar. (n.d.). Retrieved from https://tradingeconomics.com/united-states/inflation-cpi

6 Schneider, A. (2018, October 05). U.S. Unemployment Rate Drops To 3.7 Percent, Lowest In Nearly 50 Years. Retrieved from https://www.npr.org/2018/10/05/654417887/u-s-unemployment-rate-drops-to-3-7-percent-lowest-in-nearly-50-years 7 Investopedia.com. (n.d.). Retrieved from https://www.investopedia.com/ 8 Agnese, J. (2018, May 8). Food Products - Industry Overview. Retrieved September 9, 2018, from NetAdvantage: CFRA Equity Research. 9

10 NKU Home Page. (n.d.). Retrieved from https://www.nku.edu/ 11 Answers Ltd. (2018, November 12). Five Forces analysis of US Wine Industry. Retrieved from https://www.ukessays.com/essays/marketing/five-forces-analysis-of-us-wine-industry-marketing-essay.php 12 Porter’s five forces model for Alcoholic Beverage Industry (n.d.). Retrieved from http://www.paradigmstar.com/ 13 Legal Marijuana Market Worth $146.4 Billion by 2025 | CAGR: 34.6%. (n.d.). Retrieved from https://www.grandviewresearch.com/press-release/global-legal-marijuana-market 14 Iyengar, R. (2018, August 31). Coca-Cola is buying Costa Coffee for $5 billion. Retrieved September, 2018, from https://money.cnn.com/2018/08/31/investing/coca-cola-company-costa/index.html 15 Newswire, N. (2018, November 01). Canopy Growth Closes $5 Billion Constellation Brands Investment... Retrieved November 12, 2018, from https://www.newcannabisventures.com/canopy-growth-closes-5-billion-constellation-brands-investment-transaction/ 16 Nurin, T. (2018, January 31). 10 Trends That Will Determine Your Drinking In 2018. Retrieved from https://www.forbes.com/sites/taranurin/2018/01/31/ten-trends-that-will-determine-your-drinking-in-2018/#7c3635c42992

17 Bloomberg Terminal Search Financial Analysis to Custom Report. Retrieved September-November 2018. 18 SEC Form 10-K Constellation Brands, Inc. (2018). Retrieved September 17, 2018, from https://www.sec.gov/Archives/edgar/data/16918/000001691818000033/stz228201810k.htm 19 Thomson One - Constellation Brands, Inc. (n.d.). Retrieved September 17, 2018, from https://www.thomsonone.com/ 20 FactSet Company/Security, Industry Quick Screen. Retrieved November 2018. 21 GlobalData. (2018, September). Constellation Brands Inc. (STZ) Financial and Strategic SWOT Analysis Review. Retrieved September 17, 2018, from https://www.thomsonone.com/ 22 Ratings, Interest Coverage Ratios and Default Spread. (n.d.). Retrieved November 12, 2018, from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm 23 Damodaran, A. (n.d.). Retrieved November 8, 2018, from http://pages.stern.nyu.edu/~adamodar/ Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

https://www.cbrands.com/brands

https://www.bls.gov/eag/eag.us.htm

https://tradingeconomics.com/united-states/inflation-cpi

https://tradingeconomics.com/united-states/inflation-cpi

http://www.paradigmstar.com/

https://www.grandviewresearch.com/press-release/global-legal-marijuana-market

https://www.grandviewresearch.com/press-release/global-legal-marijuana-market

https://www.forbes.com/sites/taranurin/2018/01/31/ten-trends-that-will-determine-your-drinking-in-2018/#7c3635c42992



Constellation Brands, Inc.Revenue Decomposition

Fiscal Years Ending Feb. 28 2016 2017 2018 2019E 2020E 2021E 2022E 2023EBeerCases Sold (24-pack, 12 ounce equivalen 224.10 246.40 248.00 254.20 260.56 267.07 273.75 280.59Revenue per case 16.17 17.16 18.78 19.82 20.71 21.54 22.40 23.30

Beer Net Sales 3,622.60 4,229.30 4,658.50 5,037.59 5,395.88 5,752.01 6,131.64 6,536.33

Growth in Cases Sold 11.27% 9.95% 0.65% 2.50% 2.50% 2.50% 2.50% 2.50%Growth in Revenue per Case 2.10% 6.18% 9.44% 5.00% 4.50% 4.00% 4.00% 4.00%

Wine and SpiritsCases Sold (9-Liters) 68.20 69.20 59.00 59.89 60.78 61.70 62.62 63.56Revenue per case 42.90 44.83 49.60 51.83 53.39 54.46 55.55 56.66

Wine Net Sales 2,591.40 2,739.30 2,559.50 2,700.54 2,823.28 2,922.94 3,026.12 3,132.94 Spirits Net Sales 334.40 362.90 367.00 403.53 421.87 436.76 452.18 468.14

Wine and Spirits Net Sales 2,925.80 3,102.20 2,926.50 3,104.07 3,245.15 3,359.70 3,478.30 3,601.08

Growth in Cases Sold 3.33% 1.47% -14.74% 1.50% 1.50% 1.50% 1.50% 1.50%Growth in Revenue per Case -0.28% 4.50% 10.65% 4.00% 3.00% 2.00% 2.00% 2.00%

Total Net Sales 6,548.40 7,331.50 7,585.00 8,141.65 8,641.03 9,111.71 9,609.94 10,137.41

BeerPrice per Case 9.82 9.38 9.09 9.12 9.19 9.20 9.22 9.48 Price Growth -6.32% -4.51% -3.05% 0.29% 0.78% 0.19% 0.21% 2.80%

Wine and SpiritsPrice per Case 17.37 17.98 20.57 20.84 21.21 21.46 21.71 22.54 Price Growth 0.88% 3.48% 14.45% 1.28% 1.77% 1.17% 1.19% 3.81%

BeerSegment Operating Income 1,264.10 1,534.40 1,838.30 1,915.34 2,080.04 2,239.49 2,410.26 2,522.82 Total Assets 9,900.70 11,325.30 12,325.20 12,514.15 13,594.46 14,716.64 16,244.22 17,511.31

Wine and SpiritsSegment Operating Income 727.00 800.80 800.70 820.86 891.45 959.78 1,032.97 1,081.21 Total Assets 6,770.40 6,976.60 7,217.40 9,061.97 9,844.27 10,656.88 11,763.06 12,680.60

Constellation Brands, Inc.

Income Statement

Fiscal Years Ending Feb. 28 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Sales 7,223.80 8,061.60 8,326.80 8,913.12 9,443.36 9,946.13 10,477.74 11,039.93

Excise taxes 675.40 730.10 741.80 771.47 802.33 834.42 867.80 902.51

Net sales 6,548.40 7,331.50 7,585.00 8,141.65 8,641.03 9,111.71 9,609.94 10,137.41

Cost of product sold 3,385.10 3,554.20 3,468.10 3,565.25 3,682.91 3,782.02 3,884.56 4,092.98

Gross profit 3,163.30 3,777.30 4,116.90 4,576.40 4,958.12 5,329.69 5,725.38 6,044.43

Amortization of Intangible Assets 40.70 10.40 5.90 5.90 5.70 5.40 5.10 3.20

Depreciation expense 180.30 237.50 293.80 287.38 339.14 393.79 451.16 511.09

Selling, general & administrative expenses 1,177.20 1,392.40 1,532.70 1,546.91 1,641.80 1,731.23 1,825.89 1,926.11

Gain on sale of business ‐ 262.40 ‐ ‐ ‐ ‐ ‐ ‐

Operating income (loss) 1,765.10 2,399.40 2,284.50 2,736.21 2,971.48 3,199.28 3,443.23 3,604.03

Equity in earnings of equity method investees 51.10 27.30 487.20 ‐ ‐ ‐ ‐ ‐

Loss on extinguishment of debt 1.10 ‐ 97.00 ‐ ‐ ‐ ‐ ‐

Interest expense 313.90 333.30 332.00 459.06 481.21 505.84 555.90 582.83

Income (loss) before income taxes 1,501.20 2,093.40 2,342.70 2,277.14 2,490.27 2,693.43 2,887.33 3,021.20

Provision (benefit) for income taxes 440.60 554.20 11.90 478.20 522.96 565.62 606.34 634.45

Net income (loss) 1,060.60 1,539.20 2,330.80 1,798.94 1,967.31 2,127.81 2,280.99 2,386.75

Net loss attributable to noncontrolling interests -5.70 -4.10 -11.90 ‐8.00 ‐5.00 ‐2.00 0.00 3.00

Net income attributable to Constellation Brands, Inc. 1,054.90 1,535.10 2,318.90 1,790.94 1,962.31 2,125.81 2,280.99 2,389.75

EPS 5.29 7.89 12.12 9.37 10.27 11.13 11.93 12.49

Year end shares outstanding 199.46 194.60 191.31 191.08 190.99 191.00 191.12 191.35

Dividends per class A common share 1.24 1.60 2.08 2.50 3.00 3.50 3.80 3.80

Dividends per class B convertible common share 1.12 1.44 1.88 2.10 2.50 3.00 3.40 3.50


Balance Sheet


Current Assets:Cash & cash equivalents 83.10 177.40 90.30 62.63 822.72 1,520.65 2,956.76 3,778.34

Accounts receivable 732.50 737.00 776.20 846.75 897.12 944.88 995.39 1,048.79

Inventories 1,851.60 1,955.10 2,084.00 2,228.28 2,360.84 2,586.00 2,724.21 2,980.78

Prepaid expense & other current assets 310.40 360.50 523.50 534.79 566.60 596.77 628.66 662.40

Total current assets 2,977.60 3,230.00 3,474.00 3,672.44 4,647.28 5,648.30 7,305.02 8,470.31

Property, plant & equipment 3,333.40 3,932.80 4,789.70 5,652.32 6,563.18 7,519.39 8,518.22 9,557.13

Goodwill 7,138.60 7,920.50 8,083.10 8,083.10 8,083.10 8,083.10 8,083.10 8,083.10

Intangible assets 3,403.80 3,377.70 3,304.80 3,298.90 3,293.20 3,287.80 3,282.70 3,279.50

Other assets 111.60 141.40 887.10 869.36 851.97 834.93 818.23 801.87

Total assets 16,965.00 18,602.40 20,538.70 21,576.12 23,438.73 25,373.52 28,007.28 30,191.91

Current Liabilities:Notes payable to banks and short-term borrowings 408.30 606.50 746.80 784.14 823.35 862.46 901.27 939.57

Current maturities of long-term debt 856.70 910.90 22.30 575.90 575.90 575.90 1,156.25 1,156.25

Accounts payable 429.30 559.80 592.20 623.92 661.04 696.23 733.44 772.79

Accrued excise taxes 33.60 44.60 - ‐ ‐ ‐ ‐ ‐

Other accrued expenses & liabilities 544.40 575.80 583.40 579.35 613.82 646.50 681.05 717.60

Total current liabilities 2,272.30 2,697.60 1,944.70 2,563.31 2,674.10 2,781.08 3,472.01 3,586.21

Long-term debt, less current maturities 6,816.20 7,720.70 9,417.60 8,820.53 9,272.56 9,779.67 10,270.71 10,829.56

Deferred income taxes 1,022.20 1,133.60 718.30 797.00 843.48 844.21 891.67 906.36

Other liabilities 162.50 165.70 395.40 169.01 172.39 175.84 179.36 182.95

Total liabilities 10,273.20 11,717.60 12,476.00 12,349.86 12,962.54 13,580.81 14,813.76 15,505.08

CBI Stockholder Equity:Common Stock and APIC 2,591.90 2,758.70 2,828.20 3,040.32 3,253.14 3,464.59 3,672.47 3,874.45

Retained earnings 6,090.50 7,310.00 9,228.20 10,579.65 12,016.75 13,521.81 15,114.75 16,806.08

Accumulated other comprehensive income (loss) -452.50 -399.80 -202.90 ‐202.90 ‐202.90 ‐202.90 ‐202.90 ‐202.90

Total stockholders' equity before the undernoted 8,229.90 9,668.90 11,853.50 13,417.06 15,066.99 16,783.50 18,584.32 20,477.63

Less treasury stock - class A common stock, at cost 1,668.10 2,775.50 3,805.20 4,205.20 4,605.20 5,005.20 5,405.20 5,805.20

Less treasury stock - class B convertible common stock, at cost 2.20 2.20 2.20 2.20 2.20 2.20 2.20 2.20

Less total treasury stock 1,670.30 2,777.70 3,807.40 4,207.40 4,607.40 5,007.40 5,407.40 5,807.40

Total Constellation Brands, Inc. stockholder's equity (deficit) 6,559.60 6,891.20 8,046.10 9,209.66 10,459.59 11,776.10 13,176.92 14,670.23

Noncontrolling interests 132.20 -6.40 16.60 16.60 16.60 16.60 16.60 16.60

Total stockholders' equity 6,691.80 6,884.80 8,062.70 9,226.26 10,476.19 11,792.70 13,193.52 14,686.83

Total liabilities and stockholders' equity 16,965.00 18,602.40 20,538.70 21,576.12 23,438.73 25,373.52 28,007.28 30,191.91


Cash Flow Statement

Fiscal Years Ending Feb. 28 2016 2017 2018

Net income (loss) 1,060.60 1,539.20 2,330.80

Adjustments to reconcile net income to net cash provided by operating activities:Unrealized gain on equity securities - - -464.30

Net income tax benefit related to the Tax Cuts & Jobs Act - - -363.00

Depreciation 180.30 237.50 293.80

Loss on extinguishment of debt & amortization of debt issuance costs - - 108.70

Deferred tax provision (benefit) 251.00 128.70 114.90

Amortization & impairment of intangible assets 40.70 56.40 92.70

Stock-based compensation 54.00 56.10 60.90

Loss on contract termination - - 59.00

Amortization of deferred financing costs 12.00 12.70 -

Loss (gain) on sale of business - -262.40 -

Noncash portion of loss on write-off of financing costs 1.10 - -

Equity in losses (earnings) of equity method investees, net of distributed earnings - - -

Gain on remeasurement to fair value of equity method investment - - -

Impairment of goodwill & intangible assets - - -

Accounts receivable -129.80 -49.40 -34.10

Inventories 10.10 -151.00 -123.80

Prepaid expenses & other current assets 45.90 -71.60 -111.50

Accounts payable 24.70 115.90 12.80

Accrued excise taxes 5.10 16.20 -

Other accrued expenses & liabilities -116.80 106.00 -71.60

Other operating activities -25.20 -38.30 26.1

Total adjustments 353.10 156.80 -399.40

Net cash flows from operating activities 1,413.70 1,696.00 1,931.40

Cash flows from investing activities:Purchases of property, plant & equipment -891.30 -907.40 -1,057.60

Investment in equity securities - - -191.30

Purchase of businesses, net of cash acquired -1,316.40 -1,111.00 -150.10

Proceeds from sale of business - 575.30 -

Proceeds from redemption of available-for-sale debt securities - - -

Proceeds from sales of assets - - -

Proceeds from (payments related to) sale of business - - -5.00

Other investing activities 0.30 -18.70 -19.10

Net cash flows from investing activities -2,207.40 -1,461.80 -1,423.10

Cash flows from financing activities: Principal payments of long-term debt -208.70 -971.80 -7,128.70

Purchases of treasury stock -33.80 -1,122.70 -1,038.50

Dividends paid -241.60 -315.10 -400.10

Payments of debt issuance & other financing costs - -14.10 -

Payments of debt extinguishment, debt issuance & other financing costs - - -122.20

Payment of minimum tax withholdings on stock-based payment awards -38.60 -64.90 -31.70

Payment of financing costs of long-term debt -13.30 - -

Proceeds from issuance of long-term debt 610.00 1,965.60 7,933.40

Proceeds from exercise of employee stock options - - -

Net proceeds from short-term borrowings - - 137.20

Net proceeds from (repayment of) notes payable 360.60 197.10 -

Proceeds from shares issued under equity compensation plans 113.00 59.70 49.40

Excess tax benefits from stock-based payment awards 203.40 131.40 -

Proceeds from noncontrolling interests 25.00 - -

Payment of delayed purchase price arrangement - - -

Proceeds from employee stock purchases - - -

Net cash flows from financing activities 776.00 -134.80 -601.20

Effect of exchange rate changes on cash & cash equivalents -9.30 -5.10 5.80

Net increase (decrease) in cash & cash equivalents -27.00 94.30 -87.10

Cash & cash equivalents, beginning of year 110.10 83.10 177.40

Cash & cash equivalents, end of year 83.10 177.40 90.30


Cash Flow Statement

Fiscal Years Ending Feb. 28 2019E 2020E 2021E 2022E 2023E

Net income (loss) 1,790.94 1,962.31 2,125.81 2,280.99 2,389.75

Adjustments to reconcile net income to net cash provided by operating activities:Depreciation 287.38 339.14 393.79 451.16 511.09

Amortization & impairment of intangible assets 5.90 5.70 5.40 5.10 3.20

Change in deferred taxes 78.70 46.48 0.73 47.46 14.68

Accounts receivable (70.55) (50.37) (47.76) (50.50) (53.41)

Inventories (144.28) (132.56) (225.16) (138.22) (256.57)

Prepaid expenses & other current assets (11.29) (31.81) (30.17) (31.90) (33.73)

Accounts payable 31.72 37.12 35.19 37.21 39.35

Accrued excise taxes ‐ ‐ ‐ ‐ ‐

Other accrued expenses & liabilities (4.05) 34.47 32.68 34.55 36.54

Other liabilities (226.39) 3.38 3.45 3.52 3.59

Total adjustments (52.85) 251.53 168.16 358.39 264.75

Net cash flows from operating activities 1,738.10 2,213.85 2,293.97 2,639.38 2,654.50

Cash flows from investing activities:Purchases of property, plant & equipment (1,150.00) (1,250.00) (1,350.00) (1,450.00) (1,550.00)

Other investing activities 17.74 17.39 17.04 16.70 16.36

Net cash flows from investing activities (1,132.26) (1,232.61) (1,332.96) (1,433.30) (1,533.64)

Cash flows from financing activities: Proceeds from Issuance (payments) of long-term debt (43.47) 452.03 507.11 1,071.39 558.85

Purchases of treasury stock (400.00) (400.00) (400.00) (400.00) (400.00)

Dividends paid (439.49) (525.21) (620.75) (688.05) (698.42)

Net proceeds from (repayment of) notes payable 37.34 39.21 39.11 38.81 38.30

Proceeds from shares issued under equity compensation plans 212.12 212.82 211.45 207.88 201.99

Net cash flows from financing activities (633.51) (221.15) (263.08) 230.03 (299.28)

Net increase (decrease) in cash & cash equivalents (27.67) 760.09 697.93 1,436.11 821.58

Cash & cash equivalents, beginning of year 90.30 62.63 822.72 1,520.65 2,956.76

Cash & cash equivalents, end of year 62.63 822.72 1,520.65 2,956.76 3,778.34


Common Size Income Statement


Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Excise taxes 9.35% 9.06% 8.91% 8.66% 8.50% 8.39% 8.28% 8.17%

Net sales 90.65% 90.94% 91.09% 91.34% 91.50% 91.61% 91.72% 91.83%

Cost of product sold 46.86% 44.09% 41.65% 40.00% 39.00% 38.03% 37.07% 37.07%

Gross profit 43.79% 46.86% 49.44% 51.34% 52.50% 53.59% 54.64% 54.75%

Depreciation Expense 3.33% 4.39% 5.43% 5.31% 6.27% 7.28% 8.34% 9.45%

Selling, general & administrative expenses 16.30% 17.27% 18.41% 17.36% 17.39% 17.41% 17.43% 17.45%

Operating income (loss) 24.43% 29.76% 27.44% 30.70% 31.47% 32.17% 32.86% 32.65%

Equity in earnings of equity method investees 0.71% 0.34% 5.85% 0.00% 0.00% 0.00% 0.00% 0.00%

Interest expense 4.35% 4.13% 3.99% 5.15% 5.10% 5.09% 5.31% 5.28%

Income (loss) before income taxes 20.78% 25.97% 28.13% 25.55% 26.37% 27.08% 27.56% 27.37%

Provision (benefit) for income taxes 6.10% 6.87% 0.14% 5.37% 5.54% 5.69% 5.79% 5.75%

Net income (loss) 14.68% 19.09% 27.99% 20.18% 20.83% 21.39% 21.77% 21.62%

Net loss attributable to noncontrolling interests ‐0.08% ‐0.05% ‐0.14% ‐0.09% ‐0.05% ‐0.02% 0.00% 0.03%

Net income attributable to Constellation Brands, Inc. 14.60% 19.04% 27.85% 20.09% 20.78% 21.37% 21.77% 21.65%


Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Current Assets:Cash & cash equivalents 1.15% 2.20% 1.08% 0.70% 8.71% 15.29% 28.22% 34.22%

Accounts receivable 10.14% 9.14% 9.32% 9.50% 9.50% 9.50% 9.50% 9.50%

Inventories 25.63% 24.25% 25.03% 25.00% 25.00% 26.00% 26.00% 27.00%

Prepaid expense & other current assets 4.30% 4.47% 6.29% 6.00% 6.00% 6.00% 6.00% 6.00%

Total current assets 41.22% 40.07% 41.72% 41.20% 49.21% 56.79% 69.72% 76.72%

Property, plant & equipment 46.14% 48.78% 57.52% 63.42% 69.50% 75.60% 81.30% 86.57%

Goodwill 98.82% 98.25% 97.07% 90.69% 85.60% 81.27% 77.15% 73.22%

Intangible assets 47.12% 41.90% 39.69% 37.01% 34.87% 33.06% 31.33% 29.71%

Other assets 1.54% 1.75% 10.65% 9.75% 9.02% 8.39% 7.81% 7.26%

Total assets 234.85% 230.75% 246.66% 242.07% 248.20% 255.11% 267.30% 273.48%

Current Liabilities:Notes payable to banks and short-term borrowings 5.65% 7.52% 8.97% 8.80% 8.72% 8.67% 8.60% 8.51%

Current maturities of long-term debt 11.86% 11.30% 0.27% 6.46% 6.10% 5.79% 11.04% 10.47%

Accounts payable 5.94% 6.94% 7.11% 7.00% 7.00% 7.00% 7.00% 7.00%

Accrued excise taxes 0.47% 0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other accrued expenses & liabilities 7.54% 7.14% 7.01% 6.50% 6.50% 6.50% 6.50% 6.50%

Total current liabilities 31.46% 33.46% 23.35% 28.76% 28.32% 27.96% 33.14% 32.48%

Long-term debt, less current maturities 94.36% 95.77% 113.10% 98.96% 98.19% 98.33% 98.02% 98.09%

Deferred income taxes 14.15% 14.06% 8.63% 8.94% 8.93% 8.49% 8.51% 8.21%

Other liabilities 2.25% 2.06% 4.75% 1.90% 1.83% 1.77% 1.71% 1.66%

Total liabilities 142.21% 145.35% 149.83% 138.56% 137.27% 136.54% 141.38% 140.45%

CBI Stockholder Equity:Common Stock and APIC 35.88% 34.22% 33.97% 34.11% 34.45% 34.83% 35.05% 35.09%

Retained earnings 84.31% 90.68% 110.83% 118.70% 127.25% 135.95% 144.26% 152.23%

Accumulated other comprehensive income (loss) ‐6.26% ‐4.96% ‐2.44% ‐2.28% ‐2.15% ‐2.04% ‐1.94% ‐1.84%

Total stockholders' equity before the undernoted 113.93% 119.94% 142.35% 150.53% 159.55% 168.74% 177.37% 185.49%

Less treasury stock - class A common stock, at cost 23.09% 34.43% 45.70% 47.18% 48.77% 50.32% 51.59% 52.58%

Less treasury stock - class B convertible common stock, at cost 0.03% 0.03% 0.03% 0.02% 0.02% 0.02% 0.02% 0.02%

Less total treasury stock 23.12% 34.46% 45.72% 47.20% 48.79% 50.35% 51.61% 52.60%

Total Constellation Brands, Inc. stockholder's equity (deficit) 90.81% 85.48% 96.63% 103.33% 110.76% 118.40% 125.76% 132.88%

Noncontrolling interests 1.83% ‐0.08% 0.20% 0.19% 0.18% 0.17% 0.16% 0.15%

Total stockholders' equity 92.64% 85.40% 96.83% 103.51% 110.94% 118.57% 125.92% 133.03%

Total liabilities and stockholders' equity 234.85% 230.75% 246.66% 242.07% 248.20% 255.11% 267.30% 273.48%


Common Size Balance Sheet% of Assets


Current Assets:Cash & cash equivalents 0.49% 0.95% 0.44% 0.29% 3.51% 5.99% 10.56% 12.51%

Accounts receivable 4.32% 3.96% 3.78% 3.92% 3.83% 3.72% 3.55% 3.47%

Inventories 10.91% 10.51% 10.15% 10.33% 10.07% 10.19% 9.73% 9.87%

Prepaid expense & other current assets 1.83% 1.94% 2.55% 2.48% 2.42% 2.35% 2.24% 2.19%

Total current assets 17.55% 17.36% 16.91% 17.02% 19.83% 22.26% 26.08% 28.05%

Property, plant & equipment 19.65% 21.14% 23.32% 26.20% 28.00% 29.63% 30.41% 31.65%

Goodwill 42.08% 42.58% 39.36% 37.46% 34.49% 31.86% 28.86% 26.77%

Intangible assets 20.06% 18.16% 16.09% 15.29% 14.05% 12.96% 11.72% 10.86%

Other assets 0.66% 0.76% 4.32% 4.03% 3.63% 3.29% 2.92% 2.66%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Current Liabilities:Notes payable to banks and short-term borrowings 2.41% 3.26% 3.64% 3.63% 3.51% 3.40% 3.22% 3.11%

Current maturities of long-term debt 5.05% 4.90% 0.11% 2.67% 2.46% 2.27% 4.13% 3.83%

Accounts payable 2.53% 3.01% 2.88% 2.89% 2.82% 2.74% 2.62% 2.56%

Accrued excise taxes 0.20% 0.24% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other accrued expenses & liabilities 3.21% 3.10% 2.84% 2.69% 2.62% 2.55% 2.43% 2.38%

Total current liabilities 13.39% 14.50% 9.47% 11.88% 11.41% 10.96% 12.40% 11.88%

Long-term debt, less current maturities 40.18% 41.50% 45.85% 40.88% 39.56% 38.54% 36.67% 35.87%

Deferred income taxes 6.03% 6.09% 3.50% 3.69% 3.60% 3.33% 3.18% 3.00%

Other liabilities 0.96% 0.89% 1.93% 0.78% 0.74% 0.69% 0.64% 0.61%

Total liabilities 60.56% 62.99% 60.74% 57.24% 55.30% 53.52% 52.89% 51.36%

CBI Stockholder Equity:Common Stock and APIC 15.28% 14.83% 13.77% 14.09% 13.88% 13.65% 13.11% 12.83%

Retained earnings 35.90% 39.30% 44.93% 49.03% 51.27% 53.29% 53.97% 55.66%

Accumulated other comprehensive income (loss) ‐2.67% ‐2.15% ‐0.99% ‐0.94% ‐0.87% ‐0.80% ‐0.72% ‐0.67%

Total stockholders' equity before the undernoted 48.51% 51.98% 57.71% 62.18% 64.28% 66.15% 66.36% 67.82%

Less treasury stock - class A common stock, at cost 9.83% 14.92% 18.53% 19.49% 19.65% 19.73% 19.30% 19.23%

Less treasury stock - class B convertible common stock, at cost 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Less total treasury stock 9.85% 14.93% 18.54% 19.50% 19.66% 19.73% 19.31% 19.23%

Total Constellation Brands, Inc. stockholder's equity (deficit) 38.67% 37.04% 39.18% 42.68% 44.63% 46.41% 47.05% 48.59%

Noncontrolling interests 0.78% ‐0.03% 0.08% 0.08% 0.07% 0.07% 0.06% 0.05%

Total stockholders' equity 39.44% 37.01% 39.26% 42.76% 44.70% 46.48% 47.11% 48.64%

Total liabilities and stockholders' equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%


Weighted Average Cost of Capital (WACC) Estimation

Risk Free: 3.24%

Risk Premium: 5.32%

Beta: 0.652

Cost of Equity 6.71%

Debt Rating BBB

Default Spread 1.27%

Pre‐Tax Cost of Debt 4.51%

Tax Rate 21%

After‐Tax Cost of Debt 3.56%

Weight: Equity $34,017,165,000

% Allocation: 76%

Weight: Debt 10,611,815,305$

% Allocation: 24%

WACC= 5.96%

Constellation Brands, Inc.Value Driver Estimation


NOPLAT 1,409.48 1,571.10 1,752.98 2,269.79 2,427.41 2,564.26 2,807.31 2,904.67 Sales 7,223.80 8,061.60 8,326.80 8,913.12 9,443.36 9,946.13 10,477.74 11,039.93 ‐Excise Tax 675.40 730.10 741.80 771.47 802.33 834.42 867.80 902.51 ‐COGS 3,425.80 3,564.60 3,474.00 3,565.25 3,682.91 3,782.02 3,884.56 4,092.98 ‐SGA 1,177.20 1,392.40 1,532.70 1,546.91 1,641.80 1,731.23 1,825.89 1,926.11 ‐Depreciation 180.30 237.50 293.80 287.38 339.14 393.79 451.16 511.09 ‐Amortization of Non‐Goodwill Intangibles 40.70 10.40 5.90 5.90 5.70 5.40 5.10 3.20 +Implied Interest on Operating Leases 13.78 12.56 16.92 19.17 23.19 25.51 28.07 30.87

EBITA 1,738.18 2,139.16 2,295.52 2,755.38 2,994.68 3,224.79 3,471.30 3,634.90

Income Tax Provision 440.60 554.20 11.90 478.20 522.96 565.62 606.34 634.45 Tax Shield on Interest Expense 114.57 120.32 110.89 82.63 86.62 91.05 100.06 104.91 Tax Shield on Interest on operating leases 5.03 4.53 5.65 3.45 4.18 4.59 5.05 5.56

Less: Adjusted Taxes 560.20 679.05 128.44 564.28 613.75 661.27 711.45 744.92

Deferred Tax Liability, net 1,021.40 1,132.40 718.30 797.00 843.48 844.21 891.67 906.36 Previous Year Deferred Tax Liability 789.90 1,021.40 1,132.40 718.30 797.00 843.48 844.21 891.67 Plus: Deferred Taxes 231.50 111.00 (414.10) 78.70 46.48 0.73 47.46 14.68

Invested Capital (IC) 8,930.33 9,621.36 11,309.72 12,622.39 13,702.46 14,924.88 16,109.60 17,461.51 Normal Cash 78.34 87.42 90.30 96.66 102.41 107.86 113.63 119.72 Accounts receivable 732.50 737.00 776.20 846.75 897.12 944.88 995.39 1,048.79 Inventory 1,851.60 1,955.10 2,084.00 2,228.28 2,360.84 2,586.00 2,724.21 2,980.78 Other Current Assets 310.40 360.50 523.50 534.79 566.60 596.77 628.66 662.40 Accounts payable 429.30 559.80 592.20 623.92 661.04 696.23 733.44 772.79 Accrued excise taxes 33.60 44.60 ‐ ‐ ‐ ‐ ‐ ‐ Other accrued expenses and liabilities 544.40 575.80 583.40 579.35 613.82 646.50 681.05 717.60

Operating Working Capital 1,965.54 1,959.82 2,298.40 2,503.20 2,652.12 2,892.78 3,047.39 3,321.30

Plus: Net PPE 3,333.40 3,932.80 4,789.70 5,652.32 6,563.18 7,519.39 8,518.22 9,557.13

Plus: PV of Operating Leases 278.49 375.34 425.12 467.63 514.39 565.83 622.41 684.65 Intangible Assets 3,403.80 3,377.70 3,304.80 3,298.90 3,293.20 3,287.80 3,282.70 3,279.50 Other Assets 111.60 141.40 887.10 869.36 851.97 834.93 818.23 801.87 Plus: Other Long‐Term Operating Assets 3,515.40 3,519.10 4,191.90 4,168.26 4,145.17 4,122.73 4,100.93 4,081.37 Less: Other Long‐Term Operating Liabilities 162.50 165.70 395.40 169.01 172.39 175.84 179.36 182.95

ROIC 17.38% 17.59% 18.22% 20.07% 19.23% 18.71% 18.81% 18.03%Beg. Invested Capital 8,107.87 8,930.33 9,621.36 11,309.72 12,622.39 13,702.46 14,924.88 16,109.60 NOPLAT 1,409.48 1,571.10 1,752.98 2,269.79 2,427.41 2,564.26 2,807.31 2,904.67

EP 926.26 1,038.87 1,179.56 1,595.75 1,675.13 1,747.61 1,917.80 1,944.55 Beg. Invested Capital 8,107.87 8,930.33 9,621.36 11,309.72 12,622.39 13,702.46 14,924.88 16,109.60 (ROIC ‐ WACC) 11.42% 11.63% 12.26% 14.11% 13.27% 12.75% 12.85% 12.07%

FCF 587.02 880.07 64.63 957.12 1,347.34 1,341.83 1,622.59 1,552.76 NOPLAT 1,409.48 1,571.10 1,752.98 2,269.79 2,427.41 2,564.26 2,807.31 2,904.67 Beg. Inv. Capital ‐ End Inv Capital (822.46) (691.04) (1,688.35) (1,312.68) (1,080.07) (1,222.42) (1,184.72) (1,351.90)


Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 2.00%

CV ROIC 18.26%

WACC 5.96%


Fiscal Years Ending Feb. 28 2019E 2020E 2021E 2022E 2023E(CV)

DCF Model

NOPLAT 2,269.79 2,427.41 2,564.26 2,807.31 2,904.67

Invested Capital 1,312.68 1,080.07 1,222.42 1,184.72 1,351.90

FCF 957.12 1,347.34 1,341.83 1,622.59 1,552.76

Discount Periods 1 2 3 4 4

Discount Rate 1.06 1.12 1.19 1.26 1.26

Discounted FCF 903.28 1,200.03 1,127.91 1,287.19

CV 65,318.90

PV FCF 4,518.42

PV of CV 51,817.07

Value of Operating Assets 56,335.49

+ Minority Interest Asset 16.60

+ Reduction in FV of Contingent Lia 8.10

‐ PV Operating Leases (425.12)

‐ PV Employee Stock Options (1,071.68)

‐ Notes Payable (746.80)

‐ Current Maturity of LT Debt (22.30)

‐ Long Term Debt (9,417.60)

‐ Other Liabilities (395.40)

Value of Equity 44,281.29

Shares Outstanding 191.31

Intrinsic Value 231.47

EP ModelNOPLAT 2,269.79 2,427.41 2,564.26 2,807.31 2,904.67

ROIC 20.07% 19.23% 18.71% 18.81% 18.03%

EP 1,595.75 1,675.13 1,747.61 1,917.80 1,944.55

PV Near Term EP 1,505.99 1,491.99 1,468.99 1,521.38

CV EP 49,209.30

PV CV EP 39,037.43

Value of Operating Assets 56,335.49

+Minority Interest Asset 16.60

+ Reduction in FV of Contingent Lia 8.10

‐PV Operating Leases (425.12)

‐ PV Employee Stock Options (1,071.68)

‐Notes Payable (746.80)

‐Current Maturity of LT Debt (22.30)

‐Long Term Debt (9,417.60)

‐Other Liabilities (395.40)

Value of Equity 44,281.29

Shares Outstanding 191.31

Intrinsic Value 231.47 ‐

Partial‐Year Adjusted Price 244.29


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018 2019E 2020E 2021E 2022E 2023E(CV)

EPS 9.37$ 10.27$ 11.13$ 11.93$ 12.49$

Key Assumptions CV growth 2.00%

CV ROE 16.27%


Future Cash Flows P/E Multiple (CV Year) 18.63

EPS (CV Year) 12.49$

Future Stock Price 232.67$

Dividends Per Share 2.50$ 3.00$ 3.50$ 3.80$ 3.80$

Future Cash Flows 2.50$ 3.00$ 3.50$ 3.80$ 3.80$

1 2 3 4 4

Discounted Cash Flows 2.34$ 2.63$ 2.88$ 2.93$ 179.46$

Intrinsic Value 190.25$

Partial‐Year Adjusted Price 200.78$


Relative Valuation Models

EPS EPS

Ticker Company Price 2019E 2020E P/E 19 P/E 20

DEO Diageo plc $139.79 $6.74 $7.15 20.74 19.55

BF‐B Brown‐Forman Corporatio $46.18 $1.71 $1.87 27.01 24.70

SAM Boston Beer Company $279.30 $8.69 $9.18 32.14 30.42

BUD Anheuser‐Busch InBev $82.25 $4.99 $5.54 16.48 14.85

TAP Molson Coors Brewing Co $59.34 $5.03 $5.19 11.80 11.43 MNST Monster Beverage Corp. $52.02 $1.98 $2.23 26.27 23.33

Average 22.41 20.71

STZ Constellation Brands, Inc. $204.75 $9.37 $10.27 21.8 19.9

Implied Relative Value:

P/E (EPS19) $ 210.01

P/E (EPS20) 212.82$

PEG (EPS19) 12.13$

PEG (EPS20) 12.35$


Key Management Ratios


Liquidity RatiosCurrent Ratio (Current Assets / Current Liabilities) 1.31 1.20 1.79 1.43 1.74 2.03 2.10 2.36

Quick Ratio ((Cash Equivalents + AR) / Current Liabilities)) 0.32 0.31 0.40 0.32 0.60 0.85 1.11 1.31

Cash Ratio ((Cash & Cash Equivalents / Current Liabilities) 0.04 0.07 0.05 0.02 0.31 0.55 0.85 1.05

Activity or Asset‐Management RatiosTotal Asset Turnover (Sales / Total Assets) 0.43 0.43 0.41 0.41 0.40 0.39 0.37 0.37

Fixed Assets Turnover (Sales / Fixed Assets) 2.17 2.05 1.74 1.58 1.44 1.32 1.23 1.16

Inventory Turnover (Sales / Inventory) 3.90 4.12 4.00 4.00 4.00 3.85 3.85 3.70

Financial Leverage RatiosDebt‐to‐Equity (Total Liabilities / Stockholder's Equity) 1.54 1.70 1.55 1.34 1.24 1.15 1.12 1.06

Equity Ratio (Total Equity / Total Assets) 0.39 0.37 0.39 0.43 0.45 0.46 0.47 0.49

Debt Ratio (Total Debt / Total Assets) 0.61 0.63 0.61 0.57 0.55 0.54 0.53 0.51

Profitability RatiosGross Margin (Gross Profits / Sales) 43.79% 46.86% 49.44% 51.34% 52.50% 53.59% 54.64% 54.75%

Operating Margin (Operating Income / Sales) 24.43% 29.76% 27.44% 30.70% 31.47% 32.17% 32.86% 32.65%

Net Profit Margin (Net Income / Sales) 14.60% 19.04% 27.85% 20.09% 20.78% 21.37% 21.77% 21.65%

Return on Assets (Net Income / Total Assets) 6.22% 8.25% 11.29% 8.30% 8.37% 8.38% 8.14% 7.92%

Return on Equity (Net Income / Stockholder's Equity) 15.76% 22.30% 28.76% 19.41% 18.73% 18.03% 17.29% 16.27%

Payout Policy RatiosClass A Div Payout Ratio (Div Class A / EPS) 23.45% 20.28% 17.16% 26.67% 29.20% 31.45% 31.84% 30.43%

Class B Div Payout Ratio (Div Class B / EPS) 21.18% 18.25% 15.51% 22.41% 24.33% 26.95% 28.49% 28.02%

Total Payout Ratio ((Div + Stock Repurchases) / Net Income) 47.83% 111.67% 77.45% 71.41% 73.91% 77.22% 77.87% 75.19%

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol STZ

Current Stock Price $204.75

Risk Free Rate 3.24%

Current Dividend Yield 1.38%

Annualized St. Dev. of Stock Returns 19.93%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 7,444,701 56.33$ 4.30 143.95$ 1,071,682,274$

Total 7,444,701 56.33$ 4.30 155.75$ 1,071,682,274$

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016)

Operating Operating Operating

Fiscal Years Ending Feb. 28 Leases Fiscal Years Ending Feb. 28 Leases Fiscal Years Ending Feb. 28 Leases

2019 53.6 2018 41.6 2017 48.8

2020 53.7 2019 46.8 2018 39.9

2021 50.3 2020 45.2 2019 32.9

2022 44 2021 43.2 2020 28.6

2023 41.3 2022 35.4 2021 26.5

Thereafter 316.3 Thereafter 285.5 Thereafter 178.6

Total Minimum Payments 559.2 Total Minimum Payments 497.7 Total Minimum Payments 355.3

Less: Interest 134 Less: Interest 122 Less: Interest 77

PV of Minimum Payments 425 PV of Minimum Payments 375 PV of Minimum Payments 278

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 4.51% Pre‐Tax Cost of Debt 4.51% Pre‐Tax Cost of Debt 4.51%

Number Years Implied by Year 6 Payment 7.7 Number Years Implied by Year 6 Payment 8.1 Number Years Implied by Year 6 Payment 6.7

Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 53.6 51.3 1 41.6 39.8 1 48.8 46.7

2 53.7 49.2 2 46.8 42.8 2 39.9 36.5

3 50.3 44.1 3 45.2 39.6 3 32.9 28.8

4 44 36.9 4 43.2 36.2 4 28.6 24.0

5 41.3 33.1 5 35.4 28.4 5 26.5 21.3

6 & beyond 41.3 210.6 6 & beyond 35.4 188.5 6 & beyond 26.5 121.2

PV of Minimum Payments 425.1 PV of Minimum Payments 375.3 PV of Minimum Payments 278.5

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 7,444,701

Average Time to Maturity (years): 4.30

Expected Annual Number of Options Exercised: 1,731,326

Current Average Strike Price: 56.33$

Cost of Equity: 6.71%

Current Stock Price: $204.75

2019E 2020E 2021E 2022E 2023E

Increase in Shares Outstanding: 1,731,326 1,731,326 1,731,326 1,731,326 1,731,326

Average Strike Price: 56.33$ 56.33$ 56.33$ 56.33$ 56.33$

Increase in Common Stock Account: 97,525,583 97,525,583 97,525,583 97,525,583 97,525,583

Change in Treasury Stock 400,000,000 400,000,000 400,000,000 400,000,000 400,000,000

Expected Price of Repurchased Shares: 204.75$ 218.48$ 233.14$ 248.78$ 265.47$

Number of Shares Repurchased: 1,953,602 1,830,795 1,715,708 1,607,856 1,506,783

Shares Outstanding (beginning of the year) 191,307,000 191,084,724 190,985,255 191,000,872 191,124,342

Plus: Shares Issued Through ESOP 1,731,326 1,731,326 1,731,326 1,731,326 1,731,326

Less: Shares Repurchased in Treasury 1,953,602 1,830,795 1,715,708 1,607,856 1,506,783

Shares Outstanding (end of the year) 191,084,724 190,985,255 191,000,872 191,124,342 191,348,885

DCF Price 244.29 1.6% 1.7% 1.8% 1.9% 2.0% 2.1% 2.2% 2.3% 2.4% DCF Price 244.29 2.8% 2.9% 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.6%

12% 211.95 215.47 219.15 223.02 227.09 231.36 235.86 240.61 245.62 0.50 341.01 330.78 321.03 311.73 302.85 294.37 286.25 278.48 271.03

14% 217.28 221.27 225.44 229.82 234.43 239.27 244.37 249.75 255.42 0.55 314.86 305.85 297.23 289.00 281.11 273.56 266.31 259.35 252.67

16% 221.31 225.64 230.19 234.95 239.96 245.23 250.78 256.63 262.82 0.60 291.78 283.78 276.11 268.76 261.71 254.94 248.43 242.16 236.13

18.26% 224.45 229.06 233.89 238.96 244.29 249.89 255.79 262.01 268.59 0.65 271.25 264.10 257.23 250.63 244.29 238.18 232.30 226.63 221.16

20% 226.97 231.80 236.86 242.18 247.76 253.63 259.81 266.33 273.22 0.70 252.87 246.44 240.25 234.30 228.56 223.02 217.68 212.53 207.55

22% 229.04 234.05 239.30 244.81 250.60 256.69 263.11 269.87 277.02 0.75 236.32 230.51 224.91 219.50 214.28 209.24 204.37 199.66 195.11

24% 230.76 235.93 241.34 247.02 252.98 259.26 265.86 272.83 280.19 0.80 221.34 216.06 210.96 206.03 201.27 196.66 192.20 187.88 183.69

DCF Price 244.29 -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% DCF Price 244.29 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%

25.00 273.01 267.75 262.44 257.07 251.65 246.18 240.65 235.07 229.43 15% 296.57 286.06 276.11 266.69 257.74 249.24 241.15 233.44 226.08

50.00 270.55 265.29 259.98 254.62 249.20 243.72 238.20 232.61 226.98 17% 290.23 280.25 270.80 261.83 253.31 245.20 237.48 230.11 223.08

75.00 268.10 262.84 257.53 252.16 246.74 241.27 235.74 230.16 224.52 19% 283.84 274.39 265.43 256.92 248.82 241.12 233.76 226.74 220.03

100.00 265.64 260.38 255.07 249.71 244.29 238.81 233.29 227.70 222.07 21% 277.41 268.48 260.01 251.96 244.29 236.98 229.99 223.32 216.94

125.00 263.19 257.93 252.62 247.25 241.83 236.36 230.83 225.25 219.61 23% 270.93 262.53 254.54 246.94 239.70 232.78 226.17 219.85 213.80

150.00 260.73 255.47 250.16 244.80 239.38 233.90 228.38 222.79 217.16 25% 264.40 256.52 249.02 241.87 235.05 228.53 222.30 216.33 210.60

175.00 258.28 253.02 247.71 242.34 236.92 231.45 225.92 220.34 214.70 27% 257.83 250.46 243.45 236.75 230.35 224.23 218.37 212.75 207.36

DCF Price 244.29 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% DCF Price 244.29 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50%

5.2% 306.31 310.10 313.93 317.80 321.71 325.66 329.65 333.68 337.76 5.2% 313.18 315.28 317.40 319.55 321.71 323.90 326.11 328.34 330.60

5.5% 277.95 281.45 284.98 288.55 292.16 295.80 299.48 303.20 306.96 5.5% 284.29 286.22 288.18 290.16 292.16 294.18 296.22 298.28 300.36

5.7% 253.43 256.67 259.95 263.26 266.60 269.98 273.39 276.84 280.32 5.7% 259.30 261.10 262.92 264.75 266.60 268.47 270.37 272.28 274.21

5.96% 232.01 235.04 238.09 241.17 244.29 247.43 250.61 253.82 257.07 5.96% 237.49 239.16 240.85 242.56 244.29 246.03 247.79 249.57 251.37

6.2% 213.16 215.98 218.84 221.72 224.64 227.58 230.55 233.55 236.59 6.2% 218.27 219.84 221.42 223.02 224.64 226.27 227.92 229.58 231.26

6.5% 196.43 199.08 201.76 204.47 207.20 209.96 212.75 215.57 218.42 6.5% 201.23 202.70 204.18 205.68 207.20 208.73 210.28 211.84 213.42

6.7% 181.48 183.98 186.50 189.05 191.63 194.23 196.85 199.51 202.19 6.7% 186.00 187.38 188.78 190.20 191.63 193.07 194.53 196.00 197.48

Sensitivity Tables

WACC

Equity Value Per ShareRisk‐Free Rate

Beta

Pre‐Tax Cost of Debt

Marginal Tax

Rate

Equity Value Per Share

Equity Value Per ShareWine & Spirits Case (Unit) Growth

Equity Value Per ShareChange in COGS Growth

Capital

Expenditures (in

millions)

Beer Case (Unit) Growth

WACC


Continuing Value Growth Rate


Continuing

Value ROIC

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