(STZ) · 11/4/2020 · The company breaks down revenue into three major product types which include Beer, Wine, and Spirits. As shown below, Beer products represent STZ’s largest

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie College of Business Jack Simpson [[email protected]] Constellation Brands, Inc. (STZ) November 4, 2020 Consumer Staples – Beverages – Wineries & Distilleries Stock Rating BUY

Investment Thesis Target Price $230 -$260 The HF is bullish on Constellation Brands and currently recommend a BUY. STZ is a leader in the higher-end alcohol market and continues to have superior margins compared to peers. The company has been able to increase its market share in the U.S. beer industry by over 5% in the past decade and continues to see strong growth in total sales. For these reasons, we recommend a BUY with around a 30% upside. Drivers of Thesis • STZ continues to focus on higher margin, higher quality products which will

continue to allow the company to expand margins and increase profitability. We have projected margins to increase to only 52.5% in 2025E. We believe the company could easily grow margins more

• We have only projected a 5-year total revenue CAGR of 2.2%. The past 5-year CAGR for STZ was 5%. We believe our revenue forecasts are still conservative and STZ could see much higher growth

• High growth potential in multiple different markets including the Canopy Growth investment, the hard seltzers industry, and increased e-commerce and direct-to-consumer sales which will increase STZ’s end markets

Risks to Thesis • STZ has seen increased negative sales growth in the Wine & Spirit segment

which saw revenue decrease by 6.4% in 2020. We have not projected growth to be that negative in our forecast period

• STZ operates in an extremely competitive industry. Consumer preferences are constantly adapting and STZ must stay on top of new products. We worry about the company’s focus majority on higher-margin beverages

Henry Fund DCF $253 Henry Fund DDM $214 Relative Multiple $248 Price Data Current Price $185.78 52wk Range $104 – 208 Consensus 1yr Target $218 Key Statistics Market Cap (B) $38.2 Shares Outstanding (M) 192.8 Institutional Ownership 84.8% Beta 1.08 Dividend Yield 1.49% Est. 5yr Growth 6.6% Price/Earnings (FY1) 21.6 Price/Earnings (FY2) 20.1 Price/Sales (TTM) 3.9 Price/Book (mrq) 2.7 Profitability Operating Margin 33.2% Profit Margin (5yr avg.) 22% ROA (5yr avg.) 8.2% ROE (5yr avg.) 20.9%

Earnings Estimates Year 2018 2019 2020 2021E 2022E 2023E EPS

HF est. $8.72

$9.28

$9.12

$9.42 $9.80

$10.11 $10.2

$11.23 $10.5

growth 7.52% 3.72% 3.70% 12 Month Performance Company Description

Constellation Brands (STZ) is a mature company that engages in the production and distribution of alcoholic beverages globally. The company was founded in 1945 and is currently headquarter in Victor, New York. The company has operations in the U.S., Mexico, New Zeeland, Italy, and Canada which has allowed the company to establish numerous different beers, wine, and spirit products. Brands include Corona, Modelo, Svedka, and more.

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N D J F M A M J J A S O

STZ S&P 500

COMPANY DESCRIPTION

Constellation Brands is an international producer and marketer of beer, wine, and spirits. The company has operations globally in the U.S., Mexico, New Zealand, Italy, and Canada. Some of Constellation Brands most well-known, high-quality brands include Corona, Modelo Especial, Robert Mondavi, Kim Crawford, and SVEDKA Vodka.

The company breaks down revenue into three major product types which include Beer, Wine, and Spirits. As shown below, Beer products represent STZ’s largest revenue stream for 2020 with 67.3% of total company sales. Wine is the company’s second largest with 28.4% of sales and finally Spirits with only 4.3% of total sales.

Source: Company 10-K

Although the company has three separate product types, STZ only breaks down revenue into two separate segments on the income statement which include Beer and Wine & Spirits.

Beer Segment

Constellation Brands is the top brewer and seller of imported beer in the United States beer market. The company focuses on the high-end segment of the U.S. beer market. This includes the imported, craft, and domestic premium beer. The company also includes alternative alcohol beverage categories in this segment like hard seltzers. Overall, the company sells numerous brands in

the high-end market which is driven largely by the company’s Mexican beer portfolio. The following visual demonstrates the Mexican brands that the company has the exclusive right to import, market and sell in the United States.


STZ is the leading imported beer company which has eight of the top fifteen top-selling imported beer brands. Within the company’s portfolio of imported brands, Modela Especial is the best-selling imported beer and the fourth best-selling beer overall. On top of this, Modelo Especial is the fastest-growing major imported beer brand in the United States. Corona Extra follows closely behind Modela Especial being the second largest imported beer and the seventh best-selling beer overall in the United States market.

The following graph demonstrates our revenue projections each year for the beer segment. We have forecasted beer segment sales growth to slow over our forecast period. We have forecasted growth of only 3.7% in 2021E. This lower growth is largely due to limited demand due to COVID-19 and further effects of the virus. In 2022, we believe we will be out of the pandemic and have forecasted sales to increase by 4.2%. Each year after we have projected sales to decrease by 0.3% from the previous year’s growth.


Wine & Spirits Segment

Constellation Brands is a leading, higher-end wine and spirits company in the United States market. The company has a portfolio that focuses on higher end, higher-margin, and higher-growth wine & spirits brands. In the U.S., STZ has 16 of the top 100 top-selling wine brands. Some of the most well know are listed below.


The following graph demonstrates our revenue projections each year for the wine & spirits segment. As you can see, this segment has experienced negative growth for the last 3 years. We suspect that growth will continue to slow as the company sells off and divests some of its wine portfolio brands.

We have forecasted growth to be -3.3% for 2021E. In 2022, after the pandemic disruptions have passed, we see growth of -0.5% which continues to decrease gradually to -0.9% in 2025E.


Geographic Breakdown

As we can see in the chart below, Constellation Brands has all sales coming from North America. This includes a very significant portion of revenue exposure in the United States with over 97.3% of total revenue in 2020 and the remaining 2.7% coming from Canada, as shown below.

Source: FactSet

As of now, we expect that STZ will continue to sell products only within North America as they have in the past. Management has given no further guidance for further expansion into regions outside of the United States and Canada. However, we do believe that STZ has the opportunity to grab a greater percentage of sales from Canada if the company focused more on marketing in this country.

Overall, we believe that the company has the ability to expand internationally. However, this would include greater economic and political risk to the company. We believe at this stage in the company’s lifecycle they will continue to try and stay on top of consumer preferences and focus on margin expansion through offering higher quality products.

Going forward, we would like to carefully monitor STZ’s global expansion and listen to company guidance on international growth. Having such a large consumer base and breweries globally, much higher growth prospects are on the horizon if STZ was to consider international sales.

Cost Structure Analysis

The following graph demonstrates Constellation Brands TTM gross, operating and net margins from the last ten years.

As you can see, STZ has been able to increase all margins across the board since 2010. Notably, Constellation Brands has increased gross margins from around 34.38% in 2010 to around 51% mid-way through 2020. STZ was also able to increase their net margin from 3.9% in 2010 to around 13.45% in 2020. STZ expanded operating margin from 9.45% in 2010 to 27.8% in 2020. By looking at this it is clearly evident that STZ has put the largest focus on increasing margins. The company has been continuing to exit out of cheap portfolio brands where margins are lower and focusing on increasing higher-margin brands both through acquisitions of smaller brewers as well as organically in house through new product ideas.

Source: Macrotrends

We have projected that STZ will have very minimal gross margin expansion over the next five years. 2019 saw a year of very small margin expansion which had gross margin increase only 0.2% from 50.4% in 2018 to 50.6% in 2019. However, in 2020 the company was able to increase gross margin to 51.8%. We believe that this trend of slow margin expansion will continue in our forecast period as further increases in margin is limited. The company continues to focus on higher margin, high-quality products, however, we believe competition will continue to squeeze margins and make it difficult for the company to further improve. STZ already had some of the highest margins against its peers. However, as the company continues to grow larger and increase production capacity, we suspect the company will continue to benefit from greater economies of scale and reduce COGS as a percentage of sales. We are also very bullish on STZ management to continue acquiring new high-margin brands.

Source: Company 10K

As shown above, we have projected gross margins to increase by 0.6% in our first forecast year (2021E) to 52.4%. We have projected margins to continue to expand over the next four year and increase to 53.1% in 2025E. We believe we are very conservative on these margin expansion projections and still have a BUY price target. We are very confident that management will be able to produce future results above our projections.

Debt Maturity Analysis

Constellation Brands has a S&P credit rating of BBB. Currently, STZ has around 27% of its capital structure in the form of debt, as calculated in our WACC. We have forecasted this capital structure to stay consistent throughout out forecast period. The following table outlines Constellation Brands long-term debt maturity schedule.

Five-Year Debt Maturity Schedule Fiscal Year Payment ($mil) 2021 $736.2 2022 1,682.2 2023 1,828.9 2024 1,393.8 2025 780.7 Thereafter 5,600.0 Total $12,021.8


As we can see, STZ has some relatively large debt maturities in the next 5 years. For the debt that the company does have maturing, we have forecasted cash flows each year that take into account this debt maturity schedule. Currently, Constellation Brands has a small amount of cash on hand which is not enough to pay off the debt that is maturing. Thus, we believe that STZ will need to continue refinancing the company’s existing debt when it matures. Due to the current interest rate environment and low rates, we believe this will be the most ideal strategy for the company.

ESG Analysis

STZ currently has an ESG score according to FactSet of 23.4, which ranks the company in the 32nd percentile. The company has a medium ranked controversy score, as well as risk score.

Under the MSCI ESG ratings scale which follows the same as bond ratings, STZ is currently ranked a BB. The

company’s BB rating has held consistent for the past five years. The following demonstrates how Constellation Brands compares with peers in different categories of ESG according to the MSCI rating scale.

Source: MSCI

As we can see, the main areas of concern for STZ are the company’s corporate governance and water stress. The company ranks average in corporate behavior, product safety & quality, health & safety, Packaging & waste, and carbon footprint. It is important to note that STZ currently is not an ESG leader in any category according to MSCI.

The company has noted they are making strategic investments in water-saving technologies and wastewater treatment measures. Multiple different STZ breweries have already significantly reduced their ratio of water used per hectoliter of beer produced. For example, the Obregon brewery water intensity rate of 3.34 liters of water used per liter finished represents a decrease of 18% in water from fiscal 2017. STZ continues to develop these same strategies and goals in all of the company’s breweries.

The company boasts an employee base of 37.4% female and 46.5% ethnic minorities. The company has a very good employee retention with staff staying for an average of 3.6 years.

RECENT DEVELOPMENTS

Q2 2021FYE Earnings Announcement

Constellation Brands reported Q2 2021 fiscal year end results for the quarter ended August 31, 2020. The company reported a strong quarter which saw EPS come in a $2.76, which represents a beat by $0.25. STZ revenue came in at $2.26 billion, which beat consensus estimates by $75.49 million. This represented the 11th consecutive quarter the company has reported earnings beat. Even

with the COVID-19 pandemic, the company has continued to see strong results helped by robust depletion growth within the company’s beer business.

Sales

STZ’s Q2 earnings of $2.76 increased by 1% year over year. However, excluding the impacts of Canopy Growth, the company posted earnings of $2.91 per share. Net sales declined by 4% from the previous year quarter to $2.26 billion. As shown below, sales were flat for the company’s beer business in Q2 2021 at $1.64 billion. This represented a 1.6% decline in shipment volume, which was offset by 4.7% depletion growth.

Sales in the Wine & Spirits segment declined by 11% for the quarter to $1.19 billion. Within Wine & Spirits, organic net sales dropped 9% and saw a 19.4% decline in shipment volume, with a 3.3% fall in depletions.

Source: Alpha street

Margins

Overall, the adjusted gross profit declined 2% to $1.19 billion. However, the adjusted gross profit margin expanded 110 bps to 52.5%. STZ’s operating income increased 1% to just below $800 million, which the operating margin improved 150 bps to 35.3%.

As for segment margins, the operating margin in the beer segment expanded 70 bps to 42.5%. The Wine & Spirits segment saw operating margin increase 310 bps to 25.9%.

We can clearly see here that beer sales have much higher margins than wine & spirits. We believe this is a large reason why STZ has been focusing on growth in the company’s beer segment and not wine & spirits.

Financial Position

As of 2020FYE February 29th, the company has significantly increased cash and cash equivalents on hand due to potential negative impacts and pressures from COVID-19.

As of end of Q2 2021, STZ had $204.6 million in cash, up significantly from $81 million as of 2020 FYE. Long-term debt is currently at $11.07 billion, as well as $11.69 million in shareholders equity.

Throughout the first six months of fiscal 2021, STZ generated operating cash flow of $1.4 billion and adjusted FCF of $1.17 billion.

The company announced a dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend will be paid to shareholders on November 20. In 2015, STZ paid a dividend of only 31 cents which shows the dividend has more than doubled in the last 5 years.

Company Quarter Developments

Throughout the latest quarter, Constellation Brands acquired a stake in Copper & Kings which helped expand the company’s premium-spirits portfolio.

The company also announced a minority stake in Brooker Vineyard’s, which is a direct-to-consumer (DTC) wine business. We believe this will allow the company to further expand their DTC business and e-commerce channels. This has been an important trend for businesses as the world becomes more technologically focused and online driven. We believe that the pandemic has only accelerated this theme.

STZ’s management team has also stated the Wine & Spirits transaction to divest a portion of the segment to E&J Gallo Winery. It is assumed this transaction will close by the end of the third quarter. The company has also agreed to sell the Paul Masson Grande Amber Brandy brand. This is also expected to close by the end of Q3. The company plans to keep the Cooks and J. Roget labels, along with the Mission Bell Winery.

What we can determine from STZ recent transactions is that the company is extremely active in the M&A space. The company acquires new higher-end brands and makes other acquisitions to help vertically integrate the company. It is important to continue monitoring STZ M&A activity to ensure they are making value adding acquisitions.

COVID-19 Impact & Outlook

Due to the impacts of COVID-19, STZ has not provided any future guidance for 2021 FYE. That being said,

management has noted they remain optimistic about the company’s brands and the resiliency on the business. We strongly agree with this statement due to the fact of how well STZ and its products have performed so far during the pandemic. It is likely the company will see strong organic growth after the pandemic is over and activities remain to normal. The company has noted that they will have 50 days of inventory on hand in order to continue distributing if forced to suspend operating. We do not believe that this will become the case at this point in the virus’s lifecycle.

During the pandemic, shipment volumes and distributor inventory levels were hit early due to the production slowdown of beer in Mexico. We see this continuing to be an issue for the company as they import products from outside of the United States. We believe that shipment volumes and inventory levels will slightly slowdown for the next year and have modeled this into our first-year projections. After that, we believe these levels will return to normal after the pandemic.

E-Commerce

In the company’s quarterly conference call, STZ announced the e-commerce market for alcohol has exploded due to the pandemic, growing 3-4 times in volume versus the prior year. The company believes that this, as well as more DTC, represent key growth drivers for the firm. This also means higher margins in the process due to increased DTC sales. The company also stated they are shifting significant resources and marketing dollars towards continuing to expand digital sales channels. We believe this could be a major growth driver for STZ in the future by realizing this consumer trend before other competitors.

Canopy Growth

On May 1, 2020, STZ announced that it would be exercising warrants which would give STZ a 38.6% stake in the cannabis company. This represents a major increase from the 9.9% ownership STZ had back in 2017 when the company first invested in the Canadian marijuana producer. In 2018, the company also invested another $4 billion into Canopy growth. As we can see, STZ continues to have a lot of confidence in Canopy as sees a large opportunity from growth potential in the market.

This all comes with the fact that Canopy Growth has recorded losses in 5 straight quarters which have totaled a

combined $2.2 billion Canadian dollars. This has significantly weighed down STZ’s own results in the process.

Over a year and a half ago, Bruce Linton, co-CEO of Canopy, was fired and STZ former CFO David Klein took over. Since then, the company has focused much more on cost control and profitability, rather than growth expansion. This was evident when the company exited out of Markets in Africa and reduced their footprint in Latin America. The company has also been making significant job cuts, and also shut down two greenhouses in order to significantly cut costs.

As the company continues to focus on cost cutting and becoming profitable, it does not mean that there still is not extreme growth potential for Canopy and STZ in the cannabis market. Constellation CEO, Bill Newlands, stated "while global legalization of cannabis is still in its infancy, we continue to believe the long-term opportunity in this evolving market is substantial." We believe that as the U.S. continues to shift to legalize cannabis, Canopy is best positioned to capture the massive growth potential in the market. Once Canopy becomes profitable, STZ will see strong financial performance considering Canopy represents around 10% of STZ total market capitalization.

U.S. Hard Seltzer Industry

Hard seltzers, commonly known as spiked seltzers, is one of the fastest growing alcoholic beverage industries, not only in the U.S. but around the world.

White Claw leads the hard seltzer market with over half of the market share. Despite White Claw’s leading position, White Claw has struggled to keep up with demand.

Although just recently starting to explode, hard seltzers currently hold a very minimal market share in the entire alcohol industry. That being said, sales of hard seltzers in North America have been much higher than the rest of the world.

The graph below demonstrates the historical and projected revenue growth within the U.S. hard seltzer market from 2016 to 2021.

Source: T4

As we can see, the size of the Hard Seltzer industry was $488 million in 2018 and grew by over 105% in 2019 to over $1 billion in revenue. From 2016 to 2021, the industry is projected to grow at a CAGR of 128%. It is important to note that the 2021 estimate was before COVID-19 and the restrictions that came along with the virus.

It is estimated that the short-term impact of COVID-19 may be high, due to the fact that seltzers are most popular in the summer, and shelter-in-place restrictions may slow demand and sales channels.

Overall, we believe that the hard seltzer industry will offer a tremendous growth potential for STZ. The company already has a strong presence with its Corona Seltzers, and we believe the company will continue to take market share as the industry grows.

Markets & Competition

The alcoholic beverage industry is very competitive due to a lack of specialization in products. After all, a beer is just a beer. That being said, players in the industry are able to differentiate themselves through different types of beer, brewer/importer, brand image, and specialties. Due to this, the industry is relatively fragmented and highly competitive.

Market Share

The following table demonstrates the change in market share within the U.S. beer brewers & importers from 2009 to 2019. As we can see, there have been significant shifts in the market share among the top five competitors in the industry. Specifically, since 2009 more than nine percent of market share has shifted from larger brewers and

importers, to smaller brewers and importers. Thus, we can conclude that the continued growth of small companies continues to put competitive pressure on larger scale brewers and importers.

U.S. Brewers/Importers Market Share

Source: America’s Beer Distributors

It is important to note, out of the largest five brewers/importers, only two have been able to increase market share over time. One of which is Constellation Brands which saw market share increase from 5% in 2019 to 10.6% in 2019. We believe that STZ will continue to increase market share as the company stays ahead of consumer demand changes and continues to tailor to higher quality products with greater margins compared to peers.

Margins

As seen, companies in the alcoholic beverage industry have relatively high margins. Constellation brands has one of the highest gross margins well above the industry average of 44.3%. There are only two other companies that have higher gross margins than Constellation Brands which are Diageo and Anheuser-Busch.

Source: FactSet

As for EBITDA, EBIT, and Net margins, STZ has the highest margins across the board and much higher than the industry average.

It makes sense that STZ has very strong margins against its peers as the company has put a large focus on higher-end, higher margin products compared to its peers’ products.

Competitor Revenues

Compared to other players, STZ is on the smaller end of market and enterprise value. As seen below, STZ’s market value is nearly $19 billion lower than the peer average and nearly $33 billion lower than the average enterprise value.

Source: FactSet

The same trend appears for sales of Constellation Brands compared to its competitors. The company’s $8 billion in revenue is far behind the industry leader Anheuser-Busch with over $47 billion. The industry average sales are $17.5 billion.

Looking at both of these metrics, we believe that STZ has large potential to increase both revenues and sales. We see this as a large positive because STZ has more growth potential being small in scale compared to other industry competitors.

Valuation Metrics

STZ trades above industry averages in EV/Sales, however, on an EV/EBIT multiple, Constellation Brands trades significantly below the competitor average.

Source: FactSet

As for debt comparisons, Constellation Brands has a total Debt/EBITDA of 3.61x. This is below the average of 3.8x. Looking at total Debt/EV, STZ has 22.66% debt in its capital

structure. This is also below the industry average of 29.15%. This leads us to believe that compared to STZ’s closest peers, the company is in a strong position with its balance sheet and has significantly less debt than some other industry players.

ECONOMIC OUTLOOK

Consumer Confidence

The Consumer Confidence Index (CCI) is a predictive indicator of consumer spending and also measures the optimism of citizens in the United States. As mentioned, having a strong consumer is imperative for a company like Constellation Brands which makes consumer confidence an important economic indicator to look at when valuing STZ.

The consumer confidence index declined slightly in October, after seeing a sharp increase in September. As of October, the current index stands at 100.9, which is down from 101.3 seen in September.

The Present Situation Index, which measures the current business and labor market conditions, increased from 98.9 in September to 104.6 in October. The Expectations Index, based on consumers’ short-term outlook for market conditions, decreased below 100 dropping from 102.9 in September, to 98.4 in October.

Although consumer spending has rebounded in recent months, increasing concerns about the economic outlook amongst consumers is predicted to slow spending in the coming months. However, we do predict that consumer confidence will begin to increase in the near short-term as the world begins to find more answers to COVID-19 and a possible vaccination which has recently hit news headlines from a couple of different healthcare companies. We believe that consumer confidence will be positive in a year’s time and the Consumer Confidence Index will continue to increase to stronger levels seen pre-pandemic.

Real Gross Domestic Product (GDP)

Increased GDP will continue to drive consumer spending in the global economy as well as the consumer sector making it a key economic indicator for STZ. Real GDP is the most

important indicator of the U.S. economy which provides a clear view into the growth of an economy while taking into account inflation and deflation. It is noted that Personal consumption expenditures account for around a 68% of the share of total GDP.

From selling alcoholic beverages, STZ’s revenue is almost entirely driven by consumer spending even though alcohol was classified as an essential good throughout COVID-19. In 2019, the US economy grew by 2.3%. With the current state of the Corona virus, we expect slower global growth in the coming years. As seen below, Q1 2020 GDP was -5%, Q2 2020 GDP was -31.4%, but Q3 saw a large increase up around 33.1% on an annualize basis.

Source: U.S. Bureau of Economic Analysis

We expect growth to take hit this year due to worldwide shutdowns seen in the first two quarters of 2020, even though Q3 saw a large increase. We estimate that Q4 GDP will rise around 15% and for the year ended 2020, GDP will be around -5%. We expect the U.S. to remain in a lower growth environment until a new vaccine comes out. We expect the U.S. economy to return back to rates around the 2% level in 2022. We estimate growth to stay steady around this level for the following years, before increasing slightly to the most recent five-year GDP average of 2.3% in the long run.

Unemployment Rate

In October, the unemployment rate declined by 1% to 6.9% and the total number of unemployed persons fell by 1.5 Million to 11.1 million. Both of these measures have declined in the past six months, however, both numbers are nearly double the levels seen in February at 3.5% and 5.8 million. We expect that the unemployment rate will continue to decrease as concerns of COVID-19 fade away. We expect that unemployment levels will return to around

4-5% within the next year before leveling off around 4% in 2 years.

Source: BLS

Interest Rates

The Fed Funds Rate currently stands at 0.25%. As seen in the graph below, starting in the second half of 2019, the FED significantly cut rates. The Fed Funds rate was 2.5% in the start of 2019.

Source: FED

The FED cut rates as the economy suffered and the market outlook was very gloomy due to COVID-19. Cutting rates helps project economic growth as it allows firms to borrow capital at a cheaper cost and also used to encourages increased consumer spending.

VALUATION

Revenue

Our total revenue forecasts are slightly above consensus estimates. The following demonstrates our projected five-year CAGR’s for each of STZ’s products, as well as overall revenue.

We have a projected CAGR of 3.73% within the beer segment. The company has seen strong results in the beer segment with double digit growth each of the past five years, with 2020 growth of 8% being the only exception. We have forecasted growth to slow in 2021 due to the ongoing effects of COVID-19. However, we have projected growth to increase in 2022 before slowly decelerating minimally each year after.

We have a projected CAGR of -1.23% for the wine & spirits segment. During the most recent three years, this segment has seen negative growth each year. We have projected negative growth of 3.3% in 2021.

For total revenue, we have forecasted a CAGR of 2.22% over the next five years for total revenue. We have forecasted a CV growth rate of 1.6% in 2025.

Weighted Average Cost of Capital

We calculated a WACC of 5.26%, which we kept constant through the forecast period. We have also assumed that the company keeps a consistent capital structure as a percentage of non-cash assets. Currently, STZ has 27.11% debt in their capital structure.

Cost of Debt

We calculated an after-tax cost of debt of 2.36%. We used a pre-tax cost of debt of 3.07% which was the YTM on a current 25-year STZ bond. We used a marginal tax rate of 23%. The current risk-free rate on a 10-year US Treasury is 0.78%. This implied a default premium of 2.29% on STZ’s debt.

Cost of Equity

We calculated a cost of equity of 6.34% using the CAPM equation. We used an Equity Risk Premium of 5.15% which was the consensus Henry Fund estimate. We calculated the cost of equity this using the historical 5-year monthly beta of 1.08 and a risk-free rate of 0.78%.

Models

Discounted Cash Flow (DCF)

Our discounted cash flow and economic profit analysis calculated our target price of $253 using the various assumptions discussed. The assumptions used reflected our overall opinions on the growth of the company’s segments. The current average consensus target price from STZ is around $218, representing we are more bullish than other analysts.

We have put the most emphasis on our DCF model, as we believe the DCF most accurately captures STZ’s intrinsic value due to the fact that we were able to construct varying operating scenarios and capture range of different variables that affect STZ’s share price. Looking at a range of different operating scenarios, STZ continues to project a target price above what they are currently trading at.

Relative Model

Using the relative valuation model, we compared STZ with Diageo, Heineken, Molson Coors, Anheuser-Busch InBev, and Boston Beer Company. When analyzing peers, these companies have a similar business model and sell relatively similar products. The company also stated in their 10K that these are the major competitors the firm faces. On a one year forward P/E basis, STZ trades significantly below the peer average at 18.9x versus the industry average of 34.82x. On a two year forward basis, STZ trades just below the average of 24.43x. We decided

to use the one year forward P/E, so the valuation is not disrupted from COVID-19 impacts. Using the one year forward P/E ratio, we calculated an implied share price of $248.

Valuation Summary

After analysis, the Henry Fund believes that STZ is currently trading below our forecasted intrinsic value of $240 per share. We are recommending a BUY with a potential 30% upside.

KEYS TO MONITOR

Going forward it is imperative to monitor the company’s investment in Canopy Growth in which the company currently holds a 38.6% stake in. Canopy has continued to struggle with being profitable and has recorded numerous consecutive quarters of unprofitability. However, we see a tremendous growth potential within the Cannabis industry. We believe with the new CFO coming from STZ, the company will continue putting a large emphasis on cost cutting measures rather than focusing on growth as Canopy has been burning through cash. We believe that once cannabis becomes legal in all of North America, Canopy is best positioned to capitalize on the extreme growth prospects of the industry.

We also believe that it is crucial for STZ to continue focusing on higher margin products. This is where the company specializes in and sets itself apart from peers. We expect that consumer preferences will continue to shift to more high-quality alcohol products. However, if consumer preferences shift opposite, it is imperative to monitor sales growth. If preferences change, STZ might suffer from its higher-end, higher-margin product offerings.

Beer sales continue to be imperative to the company’s growth. This has been their strongest segment and we have forecasted beer sales to continue to grow, while wine & spirits see negative growth. If beer starts to become out of fashion, STZ will not be positioned well due to divesting and selling off some of their wine brands and decreasing growth they have recently seen.

Currently, STZ is trading at around $185 per share. We believe that our target range of $230-260 is slightly above consensus. Thus, if the price of STZ is to reach $230, we might change our current recommendation and revisit the model.

REFERENCES

1. 10K 2. 10Q 3. 2020 Investor Presentation 4. Earnings Transcript 5. FactSet 6. Bloomberg 7. https://www.macrotrends.net/stocks/charts/STZ

/constellation-brands-inc/profit-margins 8. https://www.bea.gov/news/2020/gross-

domestic-product-third-quarter-2020-advance-estimate

9. https://www.bls.gov/news.release/pdf/empsit.pdf

10. https://www.nasdaq.com/articles/constellation-brands-stz-beats-on-q2-earnings-sales-2020-10-01

11. https://news.alphastreet.com/constellation-brands-nyse-stz-q2-2021-earnings-infographic/

12. https://www.t4.ai/industry/hard-seltzer-market-share

13. https://marketrealist.com/2020/07/constellation-still-believes-canopy-growth-should-you/

14. https://www.fool.com/investing/2020/05/10/constellation-brands-just-increased-its-stake-in-c.aspx

15. https://www.prnewswire.com/news-releases/canopy-growth-reports-second-quarter-fiscal-2021-financial-results-301168310.html

DISCLAIMER

Henry Fund reports are created by graduate students in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. 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 Henry Fund may hold an investment position in the companies mentioned in this report.

Constellation Brands, Inc.Revenue Decomposition

Fiscal Years Ending Feb. 28 2018 2019 2020 2021E 2022E 2023E 2024E 2025E

BeerShipment Volume 268.00 294.10 311.9 318.1 326.1 333.4 340.1 346.0Revenue per case 17.39 17.69 18.01 18.31 18.61 18.91 19.20 19.49

Beer Net Sales 4,660.40 5,202.10 5,615.90 5,825.60 6,069.76 6,305.63 6,531.44 6,745.43 Growth 10.2% 11.6% 8.0% 3.7% 4.2% 3.9% 3.6% 3.3%

Growth in Beer Cases Sold 8.8% 9.7% 6.1% 2.0% 2.5% 2.3% 2.0% 1.8%Growth in Revenue per Beer Case 1.3% 1.7% 1.8% 1.7% 1.7% 1.6% 1.6% 1.5%

Wine and SpiritsShipment Volume 59.00 58.50 53.6 50.92 49.70 48.41 47.05 45.64Revenue per case 49.49 49.81 50.89 51.80 52.79 53.84 54.97 56.18

Wine and Spirits Net Sales 2,919.90 2,913.90 2,727.60 2,637.86 2623.47 2606.36 2586.59 2564.19Growth -5.9% -0.2% -6.4% -3.3% -0.5% -0.7% -0.8% -0.9%

Growth in Wine & Spirit Cases Sold -14.7% -0.8% -8.4% -5.0% -2.4% -2.6% -2.8% -3.0%Growth in Revenue per Wine &Spirit Case 10.4% 0.6% 2.2% 1.8% 1.9% 2.0% 2.1% 2.2%

Total Net Sales 7,580.30 8,116.00 8,343.50 8,463.46 8,693.23 8,912.00 9,118.03 9,309.61 Growth in Total Net Sales 3.4% 7.1% 2.8% 1.4% 2.7% 2.5% 2.3% 2.1%

Segment Percentage of Total SalesBeer 61.5% 64.1% 67.3% 68.8% 69.8% 70.8% 71.6% 72.5%Wine and Spirits 38.5% 35.9% 32.7% 31.2% 30.2% 29.2% 28.4% 27.5%

Constellation Brands, Inc.Income Statement


Sales 7,586.4 8,115.6 8344 8,463.5 8,693.2 8,912.0 9,118.0 9,309.6 Cost of Goods Sold (COGS) 3,373.6 3,566.1 3589.3 3,619.5 3,696.1 3,766.8 3,831.1 3,888.3 Depreciation 294.0 333.0 326.5 354.6 381.1 403.9 423.4 440.0 Amortization 93.0 114.0 105 108.8 104.4 100.2 96.2 92.4 Gross Income 3,826.3 4,102.5 4323.2 4,380.6 4,511.7 4,641.0 4,767.3 4,889.0 SG&A Expense 1,378.1 1,449.5 1553 1,523.4 1,564.8 1,604.2 1,641.2 1,675.7 EBIT (Operating Income) 2,448.2 2,652.9 2770.2 2,857.2 2,946.9 3,036.9 3,126.0 3,213.3 Nonoperating Income - Net 493.9 2,076.9 -2563 - - - - - Interest Expense 336.5 414.1 429 409.0 414.4 416.5 424.8 427.7 Unusual Expense - Net 262.9 170.7 724 - - - - - Income Taxes 11.9 685.9 -967 563.1 582.5 602.7 621.3 640.7 Consolidated Net Income 2,330.8 3,459.1 21.2 1,885.1 1,950.0 2,017.7 2,080.0 2,144.9 Minority Interest 11.9 23.2 33.0 33.0 33.0 33.0 33.0 33.0 Net Income 2,318.9 3,435.9 -11.8 1,852.1 1,917.0 1,984.7 2,047.0 2,111.9 Per Share

Basic EPS (recurring) 11.3 18.2 2.61 9.8 10.2 10.5 10.9 11.3 Dividends per Share 2.08 2.96 3.00 3.15 3.31 3.47 3.65 3.83 Total Shares Outstanding 191.4 191.3 192.8 192.2 191.7 191.3 191.0 190.5

Constellation Brands, Inc.Balance Sheet


AssetsCash & Cash Equivalents 90 94 81 1,375 2,220 3,010 4,078 5,051

Short-Term Receivables 1,107 1,268 1,215 1,173 1,218 1,295 1,324 1,331 Inventories 2,084 2,130 1,374 2,118 2,119 2,132 2,116 2,104 Other Current Assets 193 192 814 356 390 416 465 525

Total Current Assets 3,474 3,684 3,484 5,022 5,947 6,852 7,983 9,011 Net Property, Plant & Equipment 4,790 5,267 5,814 6,353 6,848 7,303 7,720 8,105 Total Investments and Advances 777 6,700 4,211 4,244 4,277 4,310 4,344 4,378 Goodwill 8,083 8,089 7,757 7,757 7,757 7,757 7,757 7,757 Intangible Assets 3,305 3,198 2,719 2,610 2,506 2,406 2,309 2,217 Other Assets 110 2,293 3,337 3,300 3,303 3,297 3,282 3,258

Total Assets 20,539 29,232 27,322 29,287 30,638 31,925 33,395 34,725 Liabilities & Shareholders' Equity

Current Portion of LT Debt 769 1,857 1,051 1,474 1,358 1,206 1,258 1,177 Accounts Payable 592 617 558 614 643 655 662 669 Income Tax Payable 49 25 25 45 45 45 45 45 Other Current Liabilities 535 666 679 675 678 698 729 740

Total Current Liabilities 1,945 3,164 2,312 2,808 2,724 2,604 2,694 2,631 Long-Term Debt 9,418 11,760 11,694 11,850 12,142 12,362 12,578 12,753 Deferred Tax Liabilities 718 1,269 660 845 874 904 932 961 Other Liabilities 395 202 183 248 262 282 252 262

Total Liabilities 12,476 16,394 14,849 15,750 16,002 16,152 16,455 16,607

Common Equity and Additional Paid-In Capital 2,828 1,413 1,517 1,620 1,722 1,825 1,928 2,010 Retained Earnings 9,245 14,563 14,036 15,282 16,565 17,886 19,236 20,618 Accumulated Other Comprehensive Income (loss) -203 -354 (266) (266) (266) (266) (266) (266) Treasury Stock -3,807 -2,784 (2,814) (3,100) (3,386) (3,672) (3,958) (4,244)

Total Shareholders' Equity 8,063 12,838 12,473 13,536 14,636 15,773 16,940 18,118 Total Liabilities & Shareholders' Equity 20,539 29,232 27,322 29,287 30,638 31,925 33,395 34,725

Constellation Brands, Inc.Historical Cash Flow Statement

Fiscal Years Ending Feb. 28 2015 2016 2017 2018 2019 2020Operating Activities

Net Income 836.2 1,060.6 1,539.2 2,330.8 3,459.1 21.4Depreciation, Depletion & Amortization 202.0 221.0 293.9 386.5 447.1 431.5Deferred Taxes & Investment Tax Credit 79.3 251.0 128.7 114.9 426.9 -1153.7Other Funds 69.3 67.1 -193.6 -598.7 -2,015.1 3261.9Changes in Working Capital -105.8 -186.0 -72.2 -302.1 -71.7 -10Net Operating Cash Flow 1,081.0 1,413.7 1,696.0 1,931.4 2,246.3 2551.1

Investing ActivitiesCapital Expenditures -719.4 -891.3 -907.4 -1,057.6 -886.3 -726.5Net Assets from Acquisitions -310.3 -1,316.4 -1,111.0 -155.1 -45.6 -36.2Sale of Fixed Assets & Businesses 0.0 25.0 575.3 0.0 72.3 278Purchase/Sale of Investments 0.0 0.0 0.0 -191.3 -3,971.3 -46.7Other Funds 13.8 0.3 -18.7 -19.1 -0.9 0.4Net Investing Cash Flow -1,015.9 -2,182.4 -1,461.8 -1,423.1 -4,831.8 -531

Financing ActivitiesCash Dividends Paid 0.0 -241.6 -315.1 -400.1 -557.7 -569.2Change in Capital Stock 63.7 79.2 -1,063.0 -989.1 -441.1 28.2Issuance/Reduction of Debt, Net 298.6 748.6 1,176.8 819.7 3,605.7 -1464.8Other Funds -378.7 164.8 66.5 -31.7 -13.6 -25.6Net Financing Cash Flow -16.4 751.0 -134.8 -601.2 2,593.3 -2031.4

Exchange Rate Effect -2.50 -9.30 -5.10 5.80 -4.50 -0.9

Net Change in Cash 46.20 -27.00 94.30 -87.10 3.30 -12.2Beg. Cash 64 110 83 178 90 94End Cash 110.2 83.2 177.5 90.4 93.7 81.5

Constellation Brands, Inc.Forecasted Cash Flow Statement

Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E 2025E

Net Income 1852 1917 1985 2047 2112Operating Activities

Depreciation 355 381 404 423 440Amortization 109 104 100 96 92Change in Receivables 42 -45 -77 -29 -7Change in Inventories -744 -1 -12 15 12Change in Other Current Assets 458 -33 -26 -49 -61Change in Accounts Payable 57 29 12 7 8Change in Income Tax Payable 20 0 0 0 0Change in Other Current Liabilities -4 3 20 30 11Change in Deferred Taxes 185 29 30 28 29

Net Cash from Operating Activities 2328 2384 2435 2570 2636(Increase) Decrease in Investments -33 -33 -33 -34 -34Capital Expenditures -894 -876 -858 -841 -824Change in Other Assets 37 -3 6 15 24Change in Other Liabilities 65 14 20 -31 10

Net Cash from Investing Activities -825 -897 -866 -891 -824Change in Current Portion of LT Debt 424 -116 -152 53 -81Change in Long-Term Debt 156 292 220 216 175Repurchase of Common Stock -286 -286 -286 -286 -286Proceeds from Stock Issuance 103 103 103 103 82Dividend Payments -606 -634 -664 -696 -730

Net Cash from Financing Activities -209 -642 -780 -611 -840

Net Change in Cash 1294 845 790 1068 973

Beginning Cash Balance 81.0 1,374.5 2,219.8 3,009.6 4,078.0 Ending Cash Balance 1,374.5 2,219.8 3,009.6 4,078.0 5,050.9

Constellation Brands, Inc.Common Size Income Statement


Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Goods Sold (COGS) 44.47% 43.94% 43.02% 42.77% 42.52% 42.27% 42.02% 41.77%Depreciation 3.88% 4.10% 3.91% 4.19% 4.38% 4.53% 4.64% 4.73%Amortization 1.23% 1.40% 1.26% 1.29% 1.20% 1.12% 1.06% 0.99%Gross Income 50.44% 50.55% 51.81% 51.76% 51.90% 52.08% 52.28% 52.52%SG&A Expense 18.17% 17.86% 18.61% 18.00% 18.00% 18.00% 18.00% 18.00%EBIT (Operating Income) 32.27% 32.69% 33.20% 33.76% 33.90% 34.08% 34.28% 34.52%Nonoperating Income - Net 6.51% 25.59% -30.72% 0.00% 0.00% 0.00% 0.00% 0.00%Interest Expense 4.44% 5.10% 5.14% 4.83% 4.77% 4.67% 4.66% 4.59%Unusual Expense - Net 3.47% 2.10% 8.68% 0.00% 0.00% 0.00% 0.00% 0.00%Income Taxes 0.16% 8.45% -11.59% 6.65% 6.70% 6.76% 6.81% 6.88%Consolidated Net Income 30.72% 42.62% 0.25% 22.27% 22.43% 22.64% 22.81% 23.04%Minority Interest 0.16% 0.29% 0.40% 0.39% 0.38% 0.37% 0.36% 0.35%Net Income 30.57% 42.34% -0.14% 21.88% 22.05% 22.27% 22.45% 22.69%Per Share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Basic EPS (recurring) 0.15% 0.22% 0.03% 0.12% 0.12% 0.12% 0.12% 0.12%Dividends per Share 0.03% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%Total Shares Outstanding 2.52% 2.36% 2.31% 2.27% 2.21% 2.15% 2.09% 2.05%

Constellation Brands, Inc.Value Driver Estimation


NOPLAT:Sales 7,586 8,116 8,344 8,463 8,693 8,912 9,118 9,310 Less: Cost of Goods Sold 3,374 3,566 3,589 3,620 3,696 3,767 3,831 3,888 Less: SG&A Expenses 1,378 1,450 1,553 1,523 1,565 1,604 1,641 1,676 Less: Depreciation 294 333 327 355 381 404 423 440 Less: Amortization 93 114 105 109 104 100 96 92 Plus: Implied Interest on Operating Leases 13 14 14 18 19 20 22 23 EBITDA 2,460 2,667 2,785 2,875 2,966 3,057 3,148 3,237 Adjusted Taxes:Marginal Tax Rate 4.8% 18.5% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00%Income Tax Expense 12 686 -967 563 582 603 621 641Plus: Tax Shield on Interest Expense 16 77 99 94 95 96 98 98Plus: Tax Shield on Unusual Expense 13 32 167 0 0 0 0 0Plus: Tax Shield on Op. Lease Interest 1 3 3 4 4 5 5 5Less: Tax on Nonoperating Income -24 -384 589 0 0 0 0 0Less: Total Adjusted Taxes 18 412 -109 661 682 703 724 744Plus: Change in DTL -415 550 -609 185 29 30 28 29NOPLAT 2,027 2,805 2,285 2,398 2,313 2,384 2,452 2,521

Invested Capital (IC):Normal Cash 90 94 81 339 348 356 365 372A/R 1,107 1,268 1,215 1,173 1,218 1,295 1,324 1,331Inventory 2,084 2,130 1,374 2,118 2,119 2,132 2,116 2,104Other Current Assets 193 192 814 356 390 416 465 525Non Interest Bearing Current Liab.Less: A/P 592 617 558 614 643 655 662 669Less: Income Taxes Payable 49 25 25 45 45 45 45 45Less: Other Current Liab. 535 666 679 675 678 698 729 740Operating Working Capital 2,298 2,377 2,223 2,652 2,709 2,801 2,834 2,879

Plus: Net PPE 4,790 5,267 5,814 6,353 6,848 7,303 7,720 8,105Plus: Net Intangibles 3,305 3,198 2,719 2,610 2,506 2,406 2,309 2,217Plus: PV of Operating Lease 462 466 583 624 667 714 764 818Plus: Other Assets 110 2,293 3,337 3,300 3,303 3,297 3,282 3,258Plus: Other LT Operating Assets 8,667 11,224 12,453 12,887 13,324 13,719 14,076 14,397

Less: Other LT Operating Liab. 395 202 183 248 262 282 252 262

Invested Capital 10,570 13,399 14,492 15,292 15,770 16,238 16,658 17,014

Free Cash Flow (FCF):NOPLAT 2,027 2,805 2,285 2,398 2,313 2,384 2,452 2,521 Change in IC 825 2,830 1,093 799 479 468 420 356FCF 1,203 (25) 1,192 1,599 1,834 1,917 2,031 2,166

Return on Invested Capital (ROIC):NOPLAT 2,027 2,805 2,285 2,398 2,313 2,384 2,452 2,521 Beg. IC 9,745 10,570 13,399 14,492 15,292 15,770 16,238 16,658ROIC 20.80% 26.54% 17.05% 16.55% 15.13% 15.12% 15.10% 15.14%

Economic Profit (EP):Beg. IC 9,745 10,570 13,399 14,492 15,292 15,770 16,238 16,658x (ROIC - WACC) 15.54% 21.28% 11.79% 11.29% 9.86% 9.86% 9.84% 9.87%EP 1,514 2,249 1,580 1,636 1,508 1,554 1,597 1,645

Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS:Risk-Free Rate 0.78% 10 yr TresuryBeta 1.08 5yr monthlyEquity Risk Premium 5.15% HF estimateCost of Equity 6.34%

Cost of Debt:Risk-Free Rate 0.78% 10 yr TresuryImplied Default Premium 2.29%Pre-Tax Cost of Debt 3.07% 25yr STZ bond YTMMarginal Tax Rate 23%After-Tax Cost of Debt 2.36%

Market Value of Common Equity: MV WeightsTotal Shares Outstanding 192.84Current Stock Price $185.78MV of Equity 35,825.97 72.89%

Market Value of Debt:Current Portion of LTD 1,050.60 Long-Term Debt 11,694.00 PV of Operating Leases 582.96 MV of Total Debt 13,327.56 27.11%

Estimated WACC 5.26%

Constellation Brands, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 1.60% CV Year ROIC 15.14% WACC 5.26% Cost of Equity 6.34%

Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E 2025E

DCF Model:Free Cash Flow (FCF) 1599.3 1834.2 1917.0 2031.5 2165.5Continuing Value (CV) 61550.8PV of FCF 1519.3 1655.4 1643.6 1654.6 50133.1

Value of Operating Assets: 56,606 Non-Operating AdjustmentsAdd: Excess cash - Add: Total investments & advances 4,211 Less: ST debt (1,051) Less: LT debt (11,694) Less: PV of Operating Lease (583) Less: ESOP (331)

Value of Equity 47,159 Shares Outstanding 192.8Intrinsic Value of Last FYE 244.55$ Implied Price as of Today 252.59$

EP Model:Economic Profit (EP) 1635.6 1508.1 1554.4 1597.2 1644.6Continuing Value (CV) 44892.6PV of EP 1553.8 1361.0 1332.7 1300.9 36565.0

Total PV of EP 42,113 Invested Capital (last FYE) 14,492 Value of Operating Assets: 56,606 Non-Operating AdjustmentsAdd: Excess cash - Add: Total investments & advances 4,211 Less: ST debt (1,051) Less: LT debt (11,694) Less: PV of Operating Lease (583) Less: ESOP (331)

Value of Equity 47,159 Shares Outstanding 192.8Intrinsic Value of Last FYE 244.55$ Implied Price as of Today 252.59$

Constellation Brands, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E CV 2025E

EPS 9.81$ 10.17$ 10.55$ 10.89$

Key Assumptions CV growth of EPS 3.00% CV Year ROE 11.66% Cost of Equity 6.34%

Future Cash Flows P/E Multiple (CV Year) 22.22 EPS (CV Year) 11.26$ Future Stock Price 250.15$ Dividends Per Share 3.15 3.31 3.47 3.65 250.15$ Discounted Cash Flows 2.96 2.92 2.89 2.85 195.60

Intrinsic Value as of Last FYE 207.23$ Implied Price as of Today 214.05$

Constellation Brands, Inc.Relative Valuation Models

EPS EPSTicker Company Price FYE+1 FYE+2 P/E 20 P/E 21DGE Diageo $38.64 $1.43 $1.64 27.02 23.56 HEIA Heineken $101.90 $2.42 $4.12 42.11 24.73 TAP Molson Coors $42.79 $4.15 $4.16 10.31 10.29 BUD Anheuser-Busch InBev $66.52 $2.01 $3.15 33.09 21.12 SAM Boston Beer Company $963.45 $15.59 $22.69 61.80 42.46

Average 34.87 24.43

STZ Constellation Brands $185.78 $9.81 $10.17 18.9 18.3

Implied Relative Value: P/E (EPS20) $ 341.89 P/E (EPS21) 248.47$

Constellation Brands, Inc.Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 4.53Average Time to Maturity (years): 4.80Expected Annual Number of Options Exercised: 0.94

Current Average Strike Price: 108.87$ Cost of Equity: 6.34%Current Stock Price: $185.78

Fiscal Years Ending Feb. 28 2021E 2022E 2023E 2024E 2025EIncrease in Shares Outstanding: 0.9 0.9 0.9 0.9 0.8Average Strike Price: 108.87$ 108.87$ 108.87$ 108.87$ 108.87$ Increase in Common Stock Account: 102.6 102.6 102.6 102.6 82.1

Change in Treasury Stock 286 286 286 286 286Expected Price of Repurchased Shares: 185.78$ 197.56$ 210.09$ 223.42$ 237.58$ Number of Shares Repurchased: 1.5 1.4 1.4 1.3 1.2

Shares Outstanding (beginning of the year) 192.8 192.2 191.7 191.3 191.0Plus: Shares Issued Through ESOP 0.9 0.9 0.9 0.9 0.8Less: Shares Repurchased in Treasury 1.5 1.4 1.4 1.3 1.2Shares Outstanding (end of the year) 192.2 191.7 191.3 191.0 190.5

Constellation Brands, Inc.Valuation of Options Granted under ESOP

Current Stock Price $185.78Risk Free Rate 0.78%Current Dividend Yield 1.49%Annualized St. Dev. of Stock Returns 22.10%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 4.5254 108.87 4.80 73.09$ 331$

Total 5 108.87$ 4.80 84.62$ 330.76$

Constellation Brands, Inc.Present Value of Operating Lease Obligations

Fiscal Years Ending Feb. 28 2016 2017 2018 2019 2020Year 1 48.8 41.6 53.6 59.0 94.1Year 2 39.9 46.8 53.7 58.2 81.8Year 3 32.9 45.2 50.3 51.1 68.9Year 4 28.6 43.2 44.0 47.9 61.3Year 5 26.5 35.4 41.3 41.2 51.0Thereafter 178.6 285.5 316.3 302.1 329.7Total Minimum Payments 355.3 497.7 559.2 559.5 686.8Less: Cumulative Interest 55.4 88.8 97.1 93.5 103.8PV of Minimum Payments 299.9 408.9 462.1 466.0 583.0

Implied Interest in Year 1 Payment 44.4 9.2 12.6 14.2 14.3

Pre-Tax Cost of Debt 3.07% 3.07% 3.07% 3.07% 3.07%Years Implied by Year 6 Payment 6.7 8.1 7.7 7.3 6.5Expected Obligation in Year 6 & Beyond 26.5 35.4 41.3 41.2 51

Present Value of Lease PaymentsPV of Year 1 47.3 40.4 52.0 57.2 91.3PV of Year 2 37.6 44.1 50.5 54.8 77.0PV of Year 3 30.0 41.3 45.9 46.7 62.9PV of Year 4 25.3 38.3 39.0 42.4 54.3PV of Year 5 22.8 30.4 35.5 35.4 43.8PV of 6 & beyond 136.8 214.5 239.1 229.4 253.6Capitalized PV of Payments 299.9 408.9 462.1 466.0 583.0

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Documents

(STZ) · 11/4/2020 · The company breaks down revenue into three major product types which include Beer, Wine, and Spirits. As shown below, Beer products represent STZ’s largest