Constellation Brands Inc. (NYSE:STZ)

The period between February 2017 and February 2022 demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) and invested capital both exhibited growth initially, followed by periods of decline and stabilization. The cost of capital remained relatively stable, fluctuating within a range of approximately 13.99% to 16.07% over the observed timeframe.

Economic Profit Trend

Economic profit began with a negative value in 2017 and 2018, at -777,339 and -809,761 US$ in thousands respectively. A positive shift occurred in 2019, with economic profit reaching 472,939 US$ in thousands. However, 2020 saw a substantial decline, resulting in a significant negative economic profit of -3,825,520 US$ in thousands. This negative trend continued, albeit with a lessened magnitude, in 2021 (-667,938 US$ in thousands) and 2022 (-2,795,119 US$ in thousands).

NOPAT Analysis

NOPAT increased from 1,893,872 US$ in thousands in 2017 to 2,136,576 US$ in thousands in 2018, representing moderate growth. A substantial increase was observed in 2019, reaching 4,189,068 US$ in thousands. However, 2020 experienced a considerable decrease, resulting in a negative NOPAT of -778,137 US$ in thousands. NOPAT recovered to 2,686,552 US$ in thousands in 2021, but declined again in 2022 to 498,399 US$ in thousands.

Invested Capital Analysis

Invested capital generally increased from 17,413,511 US$ in thousands in 2017 to 24,890,124 US$ in thousands in 2019. A decrease was noted in 2020 to 21,790,300 US$ in thousands, followed by a further reduction to 21,239,800 US$ in thousands in 2021. The trend continued with a decrease to 20,491,900 US$ in thousands in 2022. The fluctuations in invested capital appear to correlate with the changes observed in NOPAT.

Cost of Capital Stability

The cost of capital remained relatively stable throughout the period, ranging from 13.99% to 16.07%. While fluctuations were present, they were less pronounced than those observed in NOPAT and invested capital. The cost of capital in 2020 was at its lowest point during the observed period, while 2022 recorded the highest cost of capital.

The significant negative economic profit in 2020 is a key observation, likely driven by the combination of negative NOPAT and a relatively stable cost of capital applied to a substantial invested capital base. The subsequent years show a partial recovery, but economic profit remained negative, indicating that returns are not consistently exceeding the cost of capital.

Net Income (Loss) Attributable to CBI

The net income attributable to the company showed a significant upward trend from 2017 to 2019, increasing from approximately 1.54 billion USD to nearly 3.44 billion USD. This represents a robust growth phase over these three years. However, there was a sharp reversal in 2020, with the company reporting a net loss of about 11.8 million USD. Following this loss, the company returned to profitability in 2021 with nearly 2 billion USD in net income. Yet in 2022, the net income again declined into negative territory, recording a loss of approximately 40.4 million USD. Overall, the data reflects considerable volatility in net income performance, especially post-2019, indicating potential challenges during and after the 2020 period.

Net Operating Profit After Taxes (NOPAT)

The net operating profit after taxes demonstrated growth from 2017 through 2019, climbing from roughly 1.89 billion USD to over 4.18 billion USD, nearly doubling during this period. This aligns with the increase in net income, indicating strong operational profitability. However, in 2020, NOPAT sharply declined into a significant negative value of approximately 778 million USD, suggesting operational difficulties or extraordinary charges impacting earnings. A recovery occurred in 2021, with NOPAT rising to about 2.69 billion USD, though this was substantially below the 2019 peak. The 2022 figure decreased again to around 498 million USD, highlighting ongoing instability in operating performance after 2019.

Overall Financial Trends

Both net income and net operating profit after taxes exhibited strong growth trends over the initial three-year period, reflecting an expanding and profitable operational phase. The year 2020 marked a critical inflection point, with both metrics showing significant downturns, possibly linked to external disruptions or internal challenges. Although there was a partial rebound in 2021, the company did not regain the peak levels seen in 2019. The subsequent decline in 2022 suggests persistent difficulties in returning to prior performance levels. The volatility captured in these key profitability measures indicates that while the company experienced robust growth earlier, it faced substantial headwinds beginning in 2020, which have had a lasting impact on financial performance.

Income Tax Provision (Benefit)

The income tax provision fluctuates significantly over the periods analyzed. In the year ending February 28, 2017, the provision was substantially high at 554,200 thousand US dollars. This value sharply decreased to 11,900 thousand US dollars in the following year, indicating a substantial reduction in tax expense or a change in tax strategy. In the year ending February 28, 2019, the provision rose again markedly to 685,900 thousand US dollars, reflecting a possible increase in taxable income or changes in tax regulations.

Notably, in the year ending February 29, 2020, there is a negative provision of -966,600 thousand US dollars, suggesting a significant tax benefit or perhaps a reversal of previous tax liabilities. Following this, the provision returned to positive figures in the subsequent years, with 511,100 thousand US dollars in 2021 and a decline to 309,400 thousand US dollars in 2022. The fluctuation highlights varying tax impacts on earnings, potentially influenced by operational performance, tax planning, or extraordinary items during these periods.

Cash Operating Taxes

Cash operating taxes exhibit a general declining trend from 2017 through 2021. Starting at 547,177 thousand US dollars in the year ending February 28, 2017, the cash taxes increased slightly to 553,637 thousand US dollars in 2018, indicating stable or increased tax payments at a cash level. From 2019 onward, a steady decrease is observed with payments dropping to 339,562 thousand US dollars, then continuing to 281,244 thousand US dollars in 2020, and further down to 259,325 thousand US dollars in 2021, which may reflect decreased taxable income or improved tax efficiency.

In the year ending February 28, 2022, there is an increase in cash taxes paid to 302,832 thousand US dollars, suggesting a rebound or change in tax obligations compared to the previous declining trend. This may be indicative of increased earnings or alterations in tax policies impacting the cash tax outflows. Overall, cash operating taxes show more stability and less volatility compared to the income tax provision figures.

Total reported debt & leases

Over the six-year period, total reported debt and leases exhibited substantial fluctuations. From 2017 to 2019, there was a notable increase, rising from approximately 9.63 billion to 14.07 billion USD. This peak was followed by a reduction in 2020 to around 12.75 billion USD, then a further decline in the subsequent years, reaching approximately 10.95 billion USD by 2022. The initial growth phase indicates a possible expansion or increased leverage, while the later decrease may suggest debt repayments or restructuring efforts.

Total CBI stockholders’ equity

Stockholders’ equity demonstrated a generally upward trajectory from 2017 through 2021. Beginning at roughly 6.89 billion USD in 2017, equity increased steadily, reaching a peak of about 13.60 billion USD in 2021. However, in 2022, there was a decline to approximately 11.73 billion USD. This trend suggests an overall strengthening of the equity base over most of the period, with a partial reversal in the most recent year, which could reflect asset revaluations, dividend payments, or other equity-affecting transactions.

Invested capital

Invested capital rose significantly from 2017 to 2019, increasing from roughly 17.41 billion USD to 24.89 billion USD. Subsequently, there was a decline in 2020 to approximately 21.79 billion USD, followed by further decreases to about 21.24 billion USD in 2021 and 20.49 billion USD in 2022. This pattern indicates an initial phase of capital expansion, possibly linked to investments or acquisitions, followed by a contraction phase, which may reflect divestitures, asset impairments, or reduced capital expenditures.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially negative, it demonstrated a period of positive value before returning to negative territory and experiencing further decline. This analysis details the observed trends in economic profit, invested capital, and the resulting economic spread ratio.

Economic Spread Ratio

The economic spread ratio began at -4.46% in 2017 and decreased slightly to -4.37% in 2018. A substantial improvement was then noted in 2019, with the ratio increasing to 1.90%, indicating a positive economic spread. However, this positive trend was short-lived, as the ratio plummeted to -17.56% in 2020. Subsequent years saw a partial recovery to -3.14% in 2021, followed by a further decline to -13.64% in 2022. The volatility suggests significant shifts in the company’s ability to generate returns exceeding its cost of capital.

Economic Profit

Economic profit mirrored the fluctuations observed in the economic spread ratio. Negative economic profit was recorded in 2017 (-777,339) and 2018 (-809,761). A positive value of 472,939 was achieved in 2019, coinciding with the positive economic spread. However, 2020 witnessed a substantial negative economic profit of -3,825,520, the largest negative value in the period. This was followed by -667,938 in 2021 and -2,795,119 in 2022, continuing the pattern of negative value creation.

Invested Capital

Invested capital generally increased from 17,413,511 in 2017 to 24,890,124 in 2019. A decrease was then observed in 2020 to 21,790,300, and continued to decline to 21,239,800 in 2021 and 20,491,900 in 2022. While the trend in invested capital is generally downward from 2019, the significant negative economic profit in 2020 and 2022 suggests that the level of invested capital is not effectively translating into economic profit.

The combination of these trends indicates a period of improving performance in 2019, followed by a substantial deterioration in 2020, with limited recovery in subsequent years. The consistently negative economic spread ratio in most years suggests that the company’s investments are, on average, not generating returns sufficient to cover the cost of capital.

The economic profit margin exhibited significant fluctuations over the observed period. Initial years demonstrated negative economic profit margins, followed by a period of positive margin, and then a return to substantial negative values.

Economic Profit Margin Trend

In February 2017, the economic profit margin was -10.60%. This decreased slightly to -10.68% in February 2018. A substantial improvement occurred in February 2019, with the margin rising to 5.83%. However, this positive trend was short-lived, as the margin plummeted to -45.85% in February 2020. A partial recovery was seen in February 2021, with the margin at -7.75%, but it deteriorated further to -31.27% in February 2022.

The economic profit margin’s volatility suggests a sensitivity to underlying economic profit drivers. The large negative margin in February 2020 warrants further investigation, as it significantly deviates from the other periods. The return to negative margins in both February 2021 and February 2022 indicates a consistent struggle to generate returns exceeding the cost of capital during those periods.

Relationship to Adjusted Net Sales

Adjusted net sales demonstrated a consistent upward trend throughout the period, increasing from US$7,331,500 thousand in February 2017 to US$8,939,000 thousand in February 2022. Despite this revenue growth, the economic profit margin did not consistently benefit, indicating that increases in sales were not sufficient to offset factors negatively impacting economic profit. The most pronounced example is February 2020, where sales increased but the economic profit margin experienced its largest decline.

The substantial negative economic profit figures, coupled with the fluctuating margin, suggest potential issues with capital allocation, cost management, or revenue generation relative to the cost of capital. Further analysis is needed to pinpoint the specific drivers behind these results.