Stock Ideas for the New Year

As we prepared for 2017, we will be looking for stock ideas to add to the portfolio. Over the next few weeks we will highlight a few of the companies that have piqued our interest. This report will highlight Constellation Brands Inc. (STZ) and Edwards Lifesciences Corp. (EW).

Constellation Brands Inc (STZ)

Company obviously has had a tough time with its stock price. They are expected to earn $7.17 over the coming twelve months and currently trading 20.8x that figure. Certainly not a deep value valuation here but the company is expected to grow earnings 37% over the next year sporting a 0.6 PEG ratio.

The fundamental slope is positive and extra weight should be applied to the balance sheet valuation metric or book value yield.

Our valuation variance is at levels that have preceded major stock price acceleration in the past.

We’re placing a fair value figure on the stock price at $180 or roughly 22% higher from these levels.

Our valuation yield rate of change is confirming the buy signal.

We will start to accumulate a position at these levels. Optimally if we were to see the stock fall further to $135-$140 per share that would be exciting.

Hedge Fund Wine, Beer Interest Bobs at 6%; Constellation Leads

12/01/16 - Main Report Activists Cool to Beverage Group for Now.

Hedge funds held a median 7% of the outstanding shares of U.S. companies in the Bloomberg Intelligence North America beverage group, as of the latest filings. Constellation Brands had the highest hedge-fund ownership at 22%, followed by Molson Coors Brewing (16%) and Boston Beer (14%). Short interest as a percentage of float was the highest for Boston Beer, at 23%. The group's best-performing one-year stock gain was generated by National Beverage (up 21%).

Constellation Brands to Join High Grade Gauge on Fitch Upgrade

11/18/16 - Constellation Brands Senior Unsecured Bond Ratings.

Fitch followed S&P in upgrading Constellation Brands' senior unsecured notes one notch to BBB-, the lowest investment grade level, on exposure to above-average market growth in the beer, wine and spirits segments, and Fitch's expectation that Constellation will maintain a 3.5x leverage target. The upgrade will trigger the transition of $3.35 billion of outstanding debt from the Bloomberg Barclays U.S. Corporate High Yield Bond Index to the high grade counterpart on the Nov. 30 index rebalancing.

Methodology: Based on Bloomberg Barclays corporate bond indices' methodology, security ratings are assigned using the middle rating of Moody's, S&P and Fitch. Moody's currently has a junk rating on Constellation but said it has put the company on review for upgrade.

U.S. Beer Sales Up 4%; Bud Light Boosted by Water-Melon-Rita

11/16/16 - Main Report IRI Nov. 6 Spirits, Suds and Soda Update.

U.S. beer sales rose 3.8% in the four weeks ended Nov. 6, based on all-channel IRI data, on 2% higher volumes. The positive performance represents a recovery following a 2.6% decline in 3Q industry sales to retailers, reflecting in part a slowing in the craft-beer segment, according to market leader Anheuser-Busch InBev. AB InBev's Bud Light held a leading 17.4% dollar-based U.S. brand share in the period, helped by the success of its new flavor variants, especially watermelon.

Wine Sales Up 4%, Direct-to-Consumer Sales Supporting Growth

11/16/16 - U.S. Wine Trends.

U.S. wine sales rose 4% in the four weeks ended Nov. 6, based on IRI data. Winemaker direct-to-consumer sales are supporting industry growth: Napa, California-based Crimson Wine Group reported a 13% year-over-year increase in net sales in 3Q, reflecting a 23% jump in direct-to-consumer sales and a 3% rise in traditional sales to wholesalers. E&J Gallo held a leading 21.2% IRI dollar-based share of the U.S. wine market in the period, followed by Constellation Brands (15.2%).

Spirits Sales Rise 4%; Jameson's Irish Whiskey Powering Gains

11/16/16 - U.S. Spirits Trends.

U.S. spirits sales rose 3.6% in the four weeks through Nov. 6 vs. a year earlier, led by a 2.2% increase in unit volume, IRI data show. The $2.1 billion U.S. Irish whiskey segment is contributing to the growth, with Pernod Ricard's Jameson brand leading the way. Its recent launch of Jameson Cooper's Croze, which is matured in virgin American oak, seasoned Bourbon and Iberian sherry barrels, has been well received by the market, according to Shanken's Impact.

Constellation Brands

11/09/16 - (Bloomberg Intelligence) -- Constellation Brands Inc.'s planned sale of Canadian wine operations is an extension of its long-standing strategy to expand margins through a focus on premium-priced brands. The company is transforming to build on its position as one of the largest and most diversified operators serving the U.S. alcoholic beverage market. Management expects to generate EPS growth of 16-19% in the fiscal year ending Feb. 28, led by strong sales and profit gains in its beer business.

Constellation Brands' sales may be challenged by the potential for Trump administration-led increase in tariffs on Mexican imports, and the approximate 15% drop in the value of the Mexican peso vs. the U.S. dollar in 2016 through Nov. 9.

Constellation Beer Sales Face Threat of Trump Tariff, Forex Risk

11/09/16 - Constellation Brands' ability to sustain rising beer segment sales is at risk given the potential for higher tariffs on Mexican imports and the 15% plunge in the Mexican peso vs. the U.S. dollar in 2016 through Nov. 9. Constellation derived about 55% of its net sales from its Mexican beer business in the fiscal year ended February. The peso's deterioration reflects in part its low expectations for economic growth and Republican President-elect Donald Trump's views on trade and immigration.

Constellation Brands said on Oct. 5 that it expected its beer business to generate as much as 17% growth in fiscal 2017, and operating profit growth at the "high teens" level.

Corona Extra, Modelo Especial Driving Constellation Sales Growth

10/06/16 - Constellation Brands' Three-Year Net Sales Trend.

Constellation Brands' net sales may rise at a low-teen pace for its fiscal year ending Feb. 28, based on consensus. Growth may be led by further beer segment gains, which grew 20% in 1H vs. the prior year. The segment is being driven mainly by market share inroads for its Corona Extra and Modelo Especial brands. Wine and spirits sales may rise at a middle single-digit pace, supported by organic volume growth and recent acquisition contributions. Consolidated organic net sales grew 11% in 1H.

Segments: Constellation Brands' Beer segment accounted for 55% of fiscal 2016 sales. The Wine & Spirits segment accounted for the remaining 45%, with wine contributing 40%, spirits 5%.

Constellation Operating Margin Boosted by Improving Sales Mix

10/06/16 - Constellation Segment Operating Margin Trends.

Constellation Brands' operating margin may widen to about 30% for the fiscal year, up from 28.5% in the prior year, based on consensus. The expansion may be led by the strong performance of the beer segment, which is benefiting from a more-profitable product mix and operating efficiency gains. Wine and spirits segment margins may widen as well, supported by volume growth and an improved sales mix. Constellation's 1H operating margin widened to 30% from 28.4% in the prior year.

Peer Comparison: Constellation Brands' fiscal 2016 operating margin of 28.5% was well above that of the BI North America beverages peer group's 15.3%, largely reflecting the company's focus on premium brands and rising operating efficiencies.

Corona Extra, Acquisitions Powering Constellation Profit Growth

10/06/16 - Constellation Brands Segment Profit Trends (TTM).

Constellation Brands' operating profits may climb at a high-teen pace in its fiscal year ended on Feb. 28, 2017, versus the prior year, based on consensus. The rapid growth may be powered mostly by an approximate 20% advance for its Beer segment, boosted by strong organic sales growth and an improving product mix toward premium priced brands. Wine and Spirits segment operating profits may rise at a single-digit rate, supported by its recent Meiomi and The Prisoner wine brands acquisitions.

Segments: Constellation Brands' Beer segment made up 63% of profit in fiscal 2016 vs. 60% in the prior year. The Wine and Spirits segment accounted for the remainder.

Corona Fuels Constellation Brands' Higher EPS Outlook: 2Q Review

10/05/16 - Main Report Constellation Brands Earnings Summary.

Key Points:

• Constellation Fiscal 2Q EPS Beat Consensus by 7%, In-Line with Its Average 8% EPS Positive Surprise in Past Three Years.
• 2Q Beer Shipment Volume Increased 15%, Above 13% Average Pace Over Past Three Years.
• Wine and Spirits Segment Shipments Rose 7%, Above Three-Year Average 2% Pace.
• 2Q Adjusted Operating Margin Widened to 30.2% vs. 28.9% in Prior Year, Reaching New Decade High.

Constellation Brands raised its full-year fiscal 2017 comparable EPS growth expectation after posting wider company margins, a 5% organic sales gain in wine and spirits in 1H and a 15% bump in organic sales of beer, spurred by the popularity of Corona. The company now expects EPS gains of up to 19% this year compared with 17% previously, off the prior year's $5.43. Priorities in 2H include integrating recent M&A. The company announced Oct. 5 it will acquire craft whiskey-maker High West Distillery for $160 million.

A Bottle of Red, a Bottle of White: More Growth Ahead

06/03/16 - Global Wine Categories by Volume.

Global wine volume may increase 2.5% annually through 2020, with still, light wines, which contain 8-14% alcohol by volume, growing 15%. This segment accounts for 77% total sales, according to Euromonitor. Red wines (41% market share) may grow 17.8%, led by steady demand for premium varietals, such as Cabernet Sauvignon, in the U.S., western Europe and Asia. White wines (29%) are also growing, supported by the U.S. and emerging markets. Leading vintners include E&J Gallo Winery and Constellation Brands.

Edwards Lifesciences Corp (EW)

EW is expected to earn $3.37 over the coming twelve months and currently trading 24.5x that figure. The company is expected to grow earnings 35% over the next year with a 0.7 PEG ratio.

The fundamental slope is positive and extra weight should be applied to the balance sheet valuation metric or book value yield as well as the cash flow metric.

Our valuation variance is at levels that have preceded major stock price acceleration in the past.

We’re placing a fair value figure on the stock price at $112 or roughly 36% higher from these levels.

Our valuation yield rate of change is confirming the buy signal.

We would like to see it below $80 and start building a position.

BI Company Primer: Edwards Lifesciences

11/22/16 - (Bloomberg Intelligence) -- Edwards Lifesciences Corp. enters a critical year in 2017 as it faces surgeons hesitant to refer less-sick patients for its transcatheter heart valve therapy and increased competition later in the year. The company may have sole advantage of the intermediate risk indication in the U.S. until 2H, a market that could be worth as much as $1.4 billion. Medtronic and Boston Scientific are on pace to launch new heart valves in late 2017 in the U.S. that could take share from Edwards, pressuring sales in 2018.

Edwards is the leader of the $2 billion transcatheter heart valve segment, with 70% market share in the U.S., according to Millennium Research Group. The company is developing transcatheter mitral valves, a market with up to 3x as many patients as aortic, that could drive future sales.

Key Points:

• Revenue: Edwards Sales Growth May Top Peers on Strong Heart Valve Demand
• U.S. Market: U.S. TAVR Market May Be Just 53% Penetrated, More Room to Grow
• U.S. Market: Edwards Heart Valve Approval May Open $1.4 Billion U.S. Market

Edwards Sales Growth May Top Peers on Strong Heart Valve Demand

11/22/16 - Edwards Lifesciences Revenue Growth %

Edwards Lifesciences may record the strongest sales growth among large-cap device makers in 2016 due to strong demand for its less-invasive transcatheter valves. The company accelerated revenue growth to 17% in 2015, excluding currency, and has increased sales at a 17% pace since launching its Sapien valve in the U.S. in 2011. Approval for the intermediate risk indication in 3Q may sustain double-digit growth long-term, but visibility is limited for 2017, given surgeons are hesitant to refer patients.

Segments: Edwards derives about 55% of revenue from transcatheter heart valves. The company expects the unit's sales this year to expand by more than 30% vs. 2015. Surgical heart valves account for about 25%, followed by critical-care monitoring devices at almost 20%.

Strong Heart Valve Sales May Sustain Margin Growth for Edwards

 11/22/16 - Edwards Adjusted Operating Margin %

Strong transcatheter heart valve sales may help Edwards Lifesciences increase its operating margin in 2016 even as the company boosts R&D spending. In 1Q, Edwards said it was adding more manufacturing capacity to support the launch of its valves for intermediate-risk patients in 2H, which may cut its gross margin 100 bps vs. 2015. Edwards may continue to improve its margin over the next few years as strong sales from new product launches could cover low incremental costs.

Peer Comparison: Edwards Lifesciences's operating margin of 26.4% is above Boston Scientific's 24% and just below Medtronic's 27%. Zimmer Biomet still ranks higher than Edwards at 30%.

Operating Profit, Cash Flow Growth Remains Strong for Edwards

11/22/16 - Edwards Lifesciences may continue to increase operating income in the teens over the next few years as the company launches its transcatheter heart valves for the intermediate- and low-risk indications. Operating income has grown at a 16% annual pace since 2012 as it launched its Sapien valve in the U.S. with few incremental costs. That has driven free cash flow growth over 20% a year during the same time frame, but most of that cash is outside the U.S. and can't be used for share buybacks.

Segments: Transcatheter heart valves may be contributing a majority of operating profit now that they generate 55% of revenue. Surgical valves are likely very profitable, but generate about 25% of sales and profit contribution may decline as transcatheter valve sales cannibalize surgical therapies.

Transcatheter Heart Valve Market May Grow 20% Through 2021

11/22/16 - Edwards Lifesciences expects the transcatheter aortic valve market to grow at a 20% annual pace through 2021 to $5 billion globally, driven by new indications and product launches. Medtronic recently increased its outlook for the market to reach $4-4.5 billion by 2020. Edwards' view may be higher due to approval of low-risk patients in additional countries. The expansion to two new indications may support double-digit sales growth for Edwards over the next few years.

Methodology: Neither company has disclosed assumptions for underlying valve prices, which could also be a reason for differences. Prices have held stable at about $30,000 so far, but competition could cause this to decline with more approvals coming in the next few years.

Intermediate Risk Helps Edwards, Competition Heats Up in 2018

11/22/16 - Edwards Lifesciences has an edge as the only company approved for the intermediate risk indication in the U.S., but competition is likely to enter in all of its indications by late 2017. Medtronic may also get intermediate risk approval in 2H17, while Boston Scientific is expected to enter the extreme and high-risk markets in the U.S. late 2017, possibly taking share from Edwards and Medtronic. Edwards may launch its Sapien 3 Ultra valve in Europe 2H, which could stem some sales losses.

Competition may heat up in Europe in 2017, as well, as Boston Scientific may launch additional sizes for its Lotus Edge valve by midyear. It may take Boston some time to train hospitals in the use of its valve, indicating more pressure on Edwards' sales in 2018.

Edwards Spends Most of Cash on Buybacks, No Dividend in Picture

11/22/16 - Edwards Lifesciences has spent more on share repurchases than its peers given it prefers to develop products internally rather than through mergers and acquisitions. The company has spent 65% of its cash on buybacks since 2011 vs. a 38% average for its cardiovascular peers. Edwards doesn't pay a dividend given its focus on product development as a growth company. The company's leadership in transcatheter heart valves may help it continue to increase cash flow, giving it flexibility for buybacks or M&A.

Edwards expects to generate $500-$600 million of free cash flow in 2016, up from $447 million in 2015, driven by strong sales growth for the company's transcatheter heart valves.

Edwards Seeks Repeat of Early Stage M&A Success, Mitral Tougher

11/22/16 - Edwards Lifesciences may be trying to replicate prior success with early stage M&A with its $350 million purchase of transcatheter mitral valve maker CardiAQ, Edwards's largest deal ever. Edwards bought access to its Sapien transcatheter aortic valve in 2003 for $125 million, a device that has generated more than $5 billion of revenue for the company since 2007. CardiAQ may be the first to launch a device transfemorally (via the leg), though mitral may be tougher than aortic due to more complex anatomy.

Edwards' Sapien Launch Disappoints, May Take Time: 3Q Review

10/26/16 - Main Report Edwards Lifesciences Earnings Summary

Key Points:

• U.S. TAVR Growth Slows to 58% in Spite of Intermediate-Risk Launch | BI »
• International TAVR Sales Growth Slows as Medtronic May Have Gained Share | BI »
• Surgical Valve Sales Flat as TAVR May Be Cannibalizing | BI »
• Edwards Raises EPS Outlook 1%, Implies 4Q EPS Below Consensus | GUID »
• Edwards May Give Timing of Mitral Valve Data at Dec. 8 Analyst Meeting | EVTS »

Edwards Lifesciences reported disappointing 3Q sales as its U.S. transcatheter valve revenue growth slowed despite launching its Sapien 3 valve for intermediate-risk patients. Management attributed the slow rollout to physicians and surgeons being hesitant to refer lower-risk patients for transcatheter therapy. U.S. transcatheter valve launches have often started slowly for Edwards, disappointing in 2012 and 2013, but sales then exceeded consensus in 2014-15 due to reimbursement and clinical data.

U.S. TAVR Market May Be Just 53% Penetrated, More Room to Grow

09/09/16 - Main Report Edwards, Medtronic Enter New Era on Intermediate Risk

The U.S. transcatheter heart valve market was just 38% penetrated in 2015 for approved indications and may reach 53% this year, based on company guidance and sales trends in 1H. That means there is room for more growth aside from indication expansion for Edwards Lifesciences and Medtronic. Strong demand for the therapy may indicate more patients previously denied surgery are being diagnosed and getting treated. That could support sales growth in the teens through 2020.

Methodology: The analysis assumes 40% of patients with severe aortic stenosis are denied surgery and that 33% of surgical patients are deemed high risk. The 2016 penetration is based on the midpoint of sales guidance for Edwards Lifesciences and Medtronic's current sales annualized.

Edwards Heart Valve Approval May Open $1.4 Billion U.S. Market

09/09/16 - The intermediate risk indication for transcatheter aortic valves may be worth as much as $1.4 billion in the U.S., based on a BI analysis. Medtronic's projections suggest the indication may be worth $1.5 billion globally by 2020. The market may top the company's expectation if diagnosis rates exceed 50%, which may be reasonable given the stronger-than-expected demand for the therapy so far. Surgeons also have flexibility in defining intermediate risk, which could increase the market size.

Companies Impacted: The FDA has said one-third of surgery patients are intermediate risk, but some physicians have said up to 50% may be in that category. Edwards Lifesciences is the only company with U.S. approval for the intermediate risk indication, while Medtronic expects to launch in this market in 2H17.

Edwards Has Trained Large Hospital Base, May Support More Growth

09/09/16 - The larger-than-expected number of U.S. hospitals trained for transcatheter heart valve therapy and shorter stays may provide more capacity to support more patients due to indication expansion. Edwards Lifesciences has trained 450 hospitals as of 2Q and may soon reach 500, above its initial peak estimate of 400. Hospital stays have fallen from six days to four days in the U.S. from 2013-15, aided by a less-invasive form of sedation. That frees up beds and improves profitability.

Companies Impacted: The use of conscious sedation, used in 25% of cases in 4Q, has been shown to significantly cut the risk of death and stroke while shortening lengths of stay. Edwards got the first approval for the intermediate risk indication on Aug. 18, while Medtronic may do so 2H17.

Low-Risk Valve Label May Disappoint Edwards, Medtronic in 2019

09/09/16 - Edwards Lifesciences and Medtronic may be on track to get U.S. approval for the low-risk indication for transcatheter heart valves by 1Q19, assuming the FDA doesn't require an advisory panel. Edwards expects to complete enrollment of its study in mid-2017, with Medtronic likely right alongside, given both started their trials at the same time. The trials both have initial data available at one-year of follow-up, indicating late 2018 release and possible approval in early 2019.

If 50% of surgical patients are deemed intermediate risk rather than the 33% being touted by Medtronic and the FDA, the low-risk approval may expand the market just $450 million. Cardiologists have shown a tendency to be more aggressive with transcatheter therapies in the past.

Edwards Gains More U.S. TAVR Share as Market Growth Accelerates

08/29/16 - Main Report Demand Remains Strong in 2Q, New Products Critical

Edwards Lifesciences gained another 150 bps of U.S. transcatheter heart valve market share sequentially in 2Q on strong clinical data. Overall industry revenue growth accelerated for a second straight quarter to 51% vs. the prior year due to data released in April showing strong outcomes for valves from both Edwards and Medtronic. Edwards may continue to gain share and grow at a rapid pace due to its intermediate risk indication approved Aug. 18, which Medtronic may not get until 2H17.

Peer Comparison: Edwards Lifesciences and Medtronic are the only companies with valves approved in the U.S. Boston Scientific may get approval for its Lotus Edge in late 2017 while St. Jude Medical may not launch until 2018.

Edwards Rebounds as Heart Valve Adoption Grows Outside U.S.

08/29/16 - Edwards gained transcatheter valve market share outside the U.S. in 2Q, but was boosted by three extra selling days that added 500 bps to its sales growth. Excluding the extra days, overall industry revenue growth still accelerated over 450 bps vs. 1Q to 21% as adoption increased in smaller countries in Europe as well as in Germany. Boston Scientific may begin to gain market share from Edwards and Medtronic in 2017 with its new Lotus Edge valve due to its small size and ability to cut paravalvular leak.

Peer Comparison: Edwards Lifesciences is the leader of the transcatheter valve market in Europe with 53% revenue share, followed by Medtronic at 32%. Boston Scientific, St. Jude Medical, Symetis and JenaValve together account for another 15%.



Disclosure: We will not be taking a position in these companies until at least 72 hours after the post of this analysis.

Joseph S. Kalinowski, CFA

Email: joe@squaredconcept.net
Twitter: @jskalinowski
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