(Reuters) - Constellation Brands Inc (STZ.N) said it expects to spend up to $1.1 billion - almost double its previous forecast - to increase capacity at a Mexican brewery, hurting its full-year profit and cash flow forecasts and sending its shares down 5 percent.
The company, which makes Svedka Vodka and Robert Mondavi wine, also reported a better-than-expected fourth-quarter quarter profit, helped by strong sales of beers such as Corona and Modelo in the United States.
The growth in beer sales was largely driven by its acquisition last year of partner Grupo Modelo SAB de CV’s GMODELOC.MX stake in a joint venture to produce and sell beer in the United States. Grupo Modelo was bought by Anheuser-Busch InBev SA (ABI.BR).
The full control of Crown Imports LLC made Constellation the largest supplier of wine, beer and other alcoholic drinks in the United States and also gave it a brewery in Nava, Mexico.
The company has been concentrating its efforts on selling more beer as sales of its wines and spirits stagnate. Beer sales outstripped wine sales in the latest quarter and is expected to do so again next year.
The expansion of the brewery would help Constellation meet the rising demand for beer, and Stifel, Nicolaus & Co’s Mark Swartzberg said the higher spending was an indication of the strength of the company’s beer business.
“We take all of this (higher investment) as a mirror on strong beer trends and continue to see an attractive risk/reward based on the beer business and underlying cash flow,” the analyst said.
Constellation on Wednesday said it would have to spend $900 million to $1.1 billion to double the brewery’s capacity, up from its previous estimate of $500-$600 million. The company has spent $140 million on expanding the brewery so far.
The bulk of the costs would go towards designing the brewery to increase production and to be able to handle additional capacity increases in the future, Chief Executive Rob Sands said on a post earnings conference call.
However, the higher costs would hurt the company’s free cash flow forecast of $425-$500 million for 2015, Chief Financial Officer Bob Ryder warned on the call. The company had free cash flow of $603 million in fiscal 2014.
Constellation said it expects full-year adjusted earnings of $3.95-$4.15 per share. Analysts on average were expecting a profit of $3.95 per share before taking in to account the higher costs.
The company said it expects beer sales to grow in the mid-single-digit percentage range in 2015. Wine and spirit sales are expected to grow in the low-to-mid single digit percentage range.
Beer sales rose 13 percent in the fourth quarter ended February 28, while wine and spirits organic sales rose just 1 percent.
Constellation’s beer sales grew as its brands such as Corona are mostly consumed in the south, a region relatively unaffected by the severe winter that blanketed many parts of North Eastern U.S., Societe Generale analyst Nicolas Ceron said.
The acquisition of Crown Imports has helped the company’s beer sales and drove most of the 86 percent rise in total sales in quarter, the company said.
Total revenue rose to $1.29 billion, in-line with analysts’ average estimate, according to Thomson Reuters I/B/E/S.
Constellation’s net income almost doubled to $157 million, or 79 cents per share.
Excluding items, it earned 81 cents per share, topping the 76 cents per share analysts on average were expecting.
Constellation’s shares rose as much as 5 percent in early trading on Wednesday, but reversed direction trade down about 3 percent at $78.95 in afternoon trading.
The stock has gained nearly 16 percent this year.
(Corrects spelling of United in paragraph 3)
Additional reporting by Devika Krishna Kumar in Bangalore; Editing by Savio D'Souza