Valens Equity Weekly Insights and Inflections for May 24, 2022

May 24, 2022

  • Constellation Brands (STZ) has transformed its profitability profile through its massive expansion in the beer market and move to premiumization over the last seven years. Uniform Accounting highlights that the market is pricing in a reversal of recent profitability expansion and below-average growth, but management is confident about executing on their strategy and is aligned to continue to do so, signaling the potential for equity upside as the company continues executing.
  • Constellation has consistently improved its returns since 2014, when it acquired Grupo Modelo’s U.S. operations. Since then, the company has significantly expanded its presence in the profitable beer market, and more recently, it has specifically focused on attacking the premium slice of all the segments of the alcohol market. All of this has driven significant growth and profitability expansion, and it has the momentum to continue doing so both in beer, wine, and spirit. If the company is able to continue executing, it should be able to beat market expectations.
  • STZ’s management is closely aligned to focus on margins, asset efficiency, and growth the three main drivers for profitability expansion and key to Constellation’s equity upside scenario.
  • Management confidence in the Q4 earnings call about continued momentum in its beer segment, rising margins in Wine & Spirits, and cost management suggest management is positioned to execute above market expectations.
  • Penn National Gaming (PENN) is being removed from the Conviction Long List. The company has been punished because of broader sports gambling industry concerns, so we are closing down -55%. Korn Ferry (KFY) is also being removed amidst a tough international operating environment. We close KFY up +57%. We are also closing Bausch Health (BHC), which is facing several setbacks towards deleveraging its balance sheet according to schedule. As such, we are closing down -42%.

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