Thursday, April 11, 2013

Investopedia: Pricey Constellation Brands Has A Lot To Live Up To

Complaining about the high valuation of beverage stocks like Coca-Cola (NYSE:KO), Diageo (NYSE:DEO), and Anheuser-Busch InBev (NYSE:BUD) is largely a futile exercise. Investors prize the strong cash flows and returns on capital that these businesses can achieve, and many analysts and investors are completely sold on the idea that ongoing income growth in the emerging market will lead to both higher sales and higher scale-driven margins down the line.

I can accept all of that to a certain point, and I certainly can't complain if the market wants to award a rich valuation to the shares of SABMiller (OTCBB:SBMRY) that I own. In the case of Constellation Brands (NYSE:STZ), I can see multiple avenues for better long-term performance, particularly if the U.S. Department of Justice ultimately gives the “all clear” to the restructured Grupo Modelo transaction. That said, investors should ignore the strong performance expectations that are already built into the valuation and the risk that the shares could underperform the market as a result.

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