Why we see a bright future for Constellation Brands and Starbucks

Investor events this week from Club holdings Constellation Brands (STZ) and Starbucks (SBUX) left shareholders like us bullish on the path forward for both beverage makers. Beer producer Constellation Brands provided a business update on Thursday during an event for investors at which management outlined its strategic priorities to foster ongoing growth. On the same day, coffee giant Starbucks held an investor event after reporting strong quarterly results before the opening bell report — an earnings report that restored investor confidence and demonstrated Starbucks’ commitment to transforming its business in the U.S. and across the globe. Constellation Brands STZ YTD mountain STZ performance year-to-date. The company called its beer business, which includes bestselling brands like Modelo Especial, Corona and Pacifico, “the main driver of our strong growth.” Management reiterated its 7% to 9% net annual sales-growth forecast for its beer business over the medium term. Constellation also sees sequential improvement in revenue growth for its historically underperforming wine-and-spirits business, which includes brand names like Woodbridge, Kim Crawford and SVEDKA. In fiscal year 2025, the company believes it can reach 1% to 3% net sales growth for the division, below a prior range of 2% to 4% growth. The company expects organic sales at the wine-and-spirits unit to decline 1% to 2% in fiscal year 2024. Constellation said Thursday that it expects to deliver double-digit diluted earnings-per-share (EPS) growth in the medium term, while also growing its operating cash flow. And management also announced a $2 billion share-repurchase authorization. The Club’s take: We were hoping to see Constellation separate its wine-and-spirits business, but we can also make the case that its better to wait and not sell while the business is down. If management delivers on its goal of sequential improvement to both the top line and profitability while hitting its targets, the wine-and-spirits unit could attract a more willing buyer. We were pleased to see the company reiterate its medium-term growth expectation for its beer business, while targeting low double-digit EPS growth excluding losses from its cannabis business, Canopy Growth. Constellation’s $2 billion share repurchase shows its disciplined approach to capital allocation, and we expect to see more consistent capital returns in the future. Indeed, activist investor Elliot Management, which entered into a cooperation agreement with Constellation earlier this year , said it is working with management to create long-term shareholder value. We added to our position in Constellation last week. Starbucks SBUX YTD mountain SBUX year-to-date performance Starbucks Thursday delivered a much better-than-expected fiscal fourth quarter , in addition to an encouraging update on its business during its investor day. A standout for the coffee giant was its stellar performance in China, the growth segment of its international business. Same-store sales in China for the quarter were up 5% year-over-year, beating analysts’ forecasts of 4.7%. Starbucks CEO Laxman Narasimhan on Thursday told Jim Cramer about the coffee giant’s plans to “continue to grow” in the world’s second largest economy. Despite the slow post-pandemic recovery, Starbucks continues to attract customers in China as a result of its high-end brand appeal. “The momentum against the backdrop of headwinds in China this past year give us optimism in our position and affirms our distinctive competitive advantages for our business,” Narasimhan said Thursday on the company’s post-earnings conference call. The company added 326 stores in China last quarter, bringing its total count to 6,806. Starbucks’ goal is to reach 9,000 stores in the country by 2025. Starbucks said it plans to improve customer convenience through increased mobile orders and drive-thru options at stores, while also investing in new equipment. And the company said it’s expanding its reward-membership program globally, putting it on track to double its membership to 75 million customers within the next five years. Lastly, Starbucks detailed strong demand in North America, where average weekly sales outpaced pre-pandemic levels by double digits last quarter. To address this unrelenting demand, Starbucks plans on building new stores with updated layouts, while “unlocking capacity” at existing stores. The company currently operates 17,800 stores in the U.S. and Canada. The Club’s take: This is a different Starbucks that is focused on increasing efficiencies. The company is run by a consumer expert in CEO Narasimhan, who we believe will lead the company to successfully execute on its targets. In addition to investing in its stores, Starbucks is also taking steps to improve the overall experience for its employees. It is a much better-run company than in the past. While there are still ongoing macroeconomic challenges in China, management is taking a long-term perspective as it continues to eye a huge growth opportunity in the country. We last added to our position in Starbucks at the start of October. (Jim Cramer’s Charitable Trust is long STZ, SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Corona beer, owned by Constellation Brands.

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Investor events this week from Club holdings Constellation Brands (STZ) and Starbucks (SBUX) left shareholders like us bullish on the path forward for both beverage makers.