Recommendation
Despite the overall loss made, on an unadjusted basis, in FY 2023, STZ has overperformed despite inflationary issues and tighter economic conditions as is seen by earnings beats in three of its prior four quarters. Prospects do appear to be better for company performance into 2023 as commodity prices are projected to continue to fall as evidenced by consensus estimates of higher adjusted net income for FY 2024. The prospects for improved company performance seem to be reflected in the STZ 5.00% 2026 notes, with the bonds trading at a higher price than the issue price earlier this year. Given the pricing relative to its peer group, we have the opinion that these notes are approximately fairly priced at current levels and offer minimal upside relative to other instruments issued by corporations with similar creditworthiness. At issue in February this year, the bond represented a spread over the US 3-year treasury of 110 basis points; this has narrowed to 72 basis points since. Additionally, the ICE BofA BBB US corporate spread over US treasuries is 173-bps, much higher than the 72-bps spread of these notes are lower than would be expected based solely on its rating (note that it is important to take into account industry-specific and other factors in assessing the relative pricing). On balance, we recommend that investors MARKETWEIGHT the STZ 5.00% 2026 bonds in their portfolio.
| Industry: | Food and Beverage |
|---|---|
| Bond Name | STZ 5.00% 2026 |
| Credit Rating (Moody’s)/Outlook | Baa3/Stable |
| Maturity | February 2nd, 2026 |
| Rank | Sr. Unsecured |
| Current Price (June 05, 2023) | US$100.12 |
| Yield to Maturity | 4.95% |
| Yield to Worst (@ call on 02/02/2024) | 4.80% |
| Recommendation | MARKETWEIGHT |
Constellation Brands Incorporated | Fixed Income Analysis
