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 13.97% to 16.06% over the observed timeframe.

Economic Profit Trend

Economic profit began with a negative value in 2017 and 2018, at -774,847 and -806,993 US$ in thousands respectively. A substantial positive shift occurred in 2019, with economic profit reaching 476,350 US$ in thousands. However, this was followed by a significant decline in 2020, resulting in a substantial negative economic profit of -3,822,764 US$ in thousands. Economic profit remained negative in both 2021 and 2022, at -664,818 and -2,792,041 US$ in thousands, respectively, though the magnitude of the loss lessened in 2021.

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 considerable increase was observed in 2019, reaching 4,189,068 US$ in thousands. However, 2020 saw a dramatic decrease, with NOPAT becoming negative at -778,137 US$ in thousands. NOPAT recovered somewhat in 2021 to 2,686,552 US$ in thousands, 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 a peak of 24,890,124 US$ in thousands in 2019. A decrease was then noted in 2020 to 21,790,300 US$ in thousands, followed by a further reduction in 2021 to 21,239,800 US$ in thousands. The decline continued into 2022, with invested capital reaching 20,491,900 US$ in thousands. This suggests a potential shift in capital allocation strategy or asset base.

Cost of Capital

The cost of capital experienced minor fluctuations throughout the period. It began at 15.33% in 2017, increased to 15.87% in 2018, decreased to 14.92% in 2019, and further decreased to 13.97% in 2020. It then rose again to 15.78% in 2021 and 16.06% in 2022. These changes, while present, were less pronounced than the variations observed in NOPAT and economic profit.

The negative economic profit in several years indicates that the company’s returns did not exceed its cost of capital during those periods. The substantial decline in economic profit in 2020, coinciding with negative NOPAT, suggests a particularly challenging year for value creation. While NOPAT showed some recovery in subsequent years, it was insufficient to consistently generate positive economic profit.

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 -4.45% in 2017 and decreased slightly to -4.35% in 2018. A substantial improvement was then noted in 2019, with the ratio reaching 1.91%, indicating positive value creation relative to invested capital. However, this positive trend was short-lived. The ratio experienced a dramatic decline in 2020, falling to -17.54%, and remained negative in subsequent years, reaching -3.13% in 2021 and -13.63% in 2022. This suggests a weakening ability to generate returns exceeding the cost of capital in the latter part of the period.

Economic Profit

Economic profit mirrored the fluctuations observed in the economic spread ratio. Negative economic profit was recorded in 2017 (-774,847) and 2018 (-806,993). A significant shift occurred in 2019, with economic profit turning positive at 476,350. However, 2020 saw a substantial negative economic profit of -3,822,764, followed by -664,818 in 2021 and -2,792,041 in 2022. The magnitude of the negative economic profit in 2020 was particularly noteworthy.

Invested Capital

Invested capital generally increased from 2017 to 2019, rising from 17,413,511 to 24,890,124. A decrease was then observed in 2020 to 21,790,300, and this trend continued, albeit at a slower pace, with values of 21,239,800 in 2021 and 20,491,900 in 2022. While invested capital decreased in the latter years, the negative economic profit suggests that the reduction in capital was not sufficient to offset the decline in profitability relative to the cost of capital.

The combined trends indicate a period of improved performance in 2019, followed by a significant deterioration in value creation. The substantial decline in the economic spread ratio and the consistently negative economic profit in recent years suggest a need for further investigation into the underlying factors driving these results.

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 -10.57%. This decreased slightly to -10.64% in February 2018. A substantial improvement occurred in February 2019, with the margin rising to 5.87%, indicating positive economic profit generation. However, this positive trend was short-lived. The margin experienced a dramatic decline in February 2020, falling to -45.82%. It partially recovered to -7.72% in February 2021, but then deteriorated further to -31.23% in February 2022.

Relationship to Adjusted Net Sales

Adjusted net sales consistently increased throughout the period, moving from US$7,331,500 thousand in February 2017 to US$8,939,000 thousand in February 2022. Despite this consistent growth in sales, the economic profit margin did not follow a corresponding upward trend. The significant negative margins in 2020 and 2022, despite higher sales, suggest that increases in costs or capital charges outpaced revenue growth.

Economic Profit Volatility

The economic profit itself demonstrated considerable volatility. Negative values were observed in 2017, 2018, 2020, 2021, and 2022, with the largest negative value occurring in 2020. The single period of positive economic profit was in 2019. This suggests inconsistent ability to generate returns exceeding the cost of capital.

The observed pattern indicates a disconnect between revenue growth and profitability from an economic value perspective. While the company increased sales, it frequently failed to translate those sales into positive economic profit, particularly in the later years of the period.