Constellation Brands vs. Diageo: Which Stock is a Better Buy?

London-based Diageo plc (DEO) produces, markets, and sells alcoholic beverages worldwide. It provides its products primarily under the Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, and Guinness brands. In comparison, Victor, N.Y.-based Constellation Brands, Inc. (STZ) produces, imports, markets, and sells beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. It provides its products to wholesale distributors, retailers, and on-premises locations.

The alcoholic beverage industry suffered a setback amid the COVID-19 pandemic, which caused a dip in retail alcohol sales, with several stadiums, concert venues, bars, and restaurants closing or operating at limited capacity. However, alcohol consumption is expected to rebound in the coming months, with the reopening of bars and restaurants with precautions to limit the spread of the COVID-19 virus. Furthermore, with an increase in the young-adult demographic and the increase in millennials’ spending power, the alcoholic beverage industry is expected to grow markedly. According to a Business Wire report, the global alcoholic beverage market is expected to grow at a 2% CAGR through 2025. Therefore, both DEO and STZ should benefit.

STZ’s shares have gained 6.9% in price over the past six months, while DEO has returned 5.2%. However, DEO’s 11.4% gains over the past nine months compare with STZ’s negative returns. Furthermore, DEO is the clear winner with 27.8% gains versus STZ’s 5.8% returns in terms of their past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Nov. 2, 2021, DEO announced a new $75 million distillery that will produce the group’s first China-origin, single malt whisky. Sam Fischer, President, Diageo Asia Pacific, and Global Travel, said, “China is the world’s largest beverage alcohol market and the demand for whisky is growing rapidly among middle-class consumers who are keen to further discover and enjoy fine whiskies.”

On Jan. 6, 2022, STZ announced that it had entered a brand authorization agreement with The Coca-Cola Company in the United States to bring the FRESCA brand into the alcoholic beverage market. Mallika Monteiro, STZ’s chief growth, strategy, and digital officer, said, “This is an exciting agreement that allows us to continue expanding our premium portfolio in ways that deliver distinctive consumer value propositions that include things like more flavor, different alcohol bases, and functional benefits.”

Recent Financial Results

DEO’s net sales increased 8.3% year-over-year to £12.70 billion ($14.38 billion) for its fiscal year ended June 30, 2021. The company’s operating profit grew 74.6% year-over-year to £3.70 billion ($4.19 billion). Also, its EPS came in at 113.8 pence, up 89.4% year-over-year.

STZ’s net sales decreased 4.8% year-over-year to $2.32 billion in its fiscal third quarter, ended Nov. 30, 2021. The company’s net income declined 62.8% year-over-year to $480.80 million. Also, its EPS came in at $2.48, down 62.1% year-over-year.

Past and Expected Financial Performance

DEO’s revenue and levered FCF have grown at CAGRs of 1.5% and 3.2%, respectively, over the past three years. Analysts expect DEO’s revenue to increase 7.8% in the current year and 6.6% next year. The company’s EPS is expected to grow 13.8% in the current year and 12.1% next year. Furthermore, its EPS is expected to grow at a 10.9% rate per annum over the next five years.

In comparison, STZ’s revenue and levered FCF have grown at CAGRs of 2.4% and 16.9%, respectively, over the past three years. The company’s revenue is expected to increase 1.3% in the current year and 7.2% next year. Its EPS is expected to grow 0.4% in the current year and 15.7% next year. And STZ’s EPS is expected to grow at a 9.6% rate  per annum over the next five years.

Profitability

DEO’s trailing-12-month revenue is 2.03 times what STZ generates. DEO is also more profitable, with a 60.43% gross profit margin compared to STZ’s 53.29%.

And DEO’s 7.18% and 9.51% respective ROA and ROTC are higher than STZ’s 6.88% and 7.85%.

Valuation

In terms of forward non-GAAP PEG, STZ is currently trading at 2.97x, which is 17.9% higher than DEO’s 2.52x. However, DEO’s 6.98x forward EV/S ratio is 9.4% higher than R’s 6.38x.

POWR Ratings

DEO has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In comparison, STZ has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DEO has a B grade for Sentiment, which is consistent with analysts’ expectations that its EPS and revenue will increase significantly in fiscal 2022. STZ has a C grade for Sentiment, which is in sync with analysts’ expectations that its EPS and revenue will increase modestly in fiscal 2022.

Moreover, DEO has a B grade for Stability, which is in sync with its 0.40 beta. In comparison, STZ has a C grade for Stability, which is consistent with its 1.18 beta.

Of the 35 stocks in the B-rated Beverages industry, DEO is ranked #12. In comparison, STZ is ranked #19.

Beyond what I have stated above, we have also rated the stocks for Growth, Value, Quality, and Momentum. Click here to view all the DEO ratings. Also, get all the STZ ratings here.

The Winner

Alcoholic beverage sales are expected to increase as bars and restaurants operate at full scale in the coming months. While both DEO and STZ are expected to gain, we think it is better to bet on DEO now because of its higher profit margin and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Beverages industry here.

DEO shares were trading at $201.54 per share on Tuesday afternoon, down $1.19 (-0.59%). Year-to-date, DEO has declined -8.45%, versus a -8.03% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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