Constellation Brands Inc. (NYSE:STZ)

The analysis of economic profit over the six-year period from 2017 to 2022 reveals a consistent struggle to generate value above the cost of capital. Economic profit remained negative for five of the six years analyzed, indicating that the operating returns were generally insufficient to cover the imputed cost of the invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited extreme volatility throughout the period. After a steady increase from 2017, a significant peak was reached in February 2019 at 4,189,068 thousand US$. This was followed by a sharp reversal into negative territory in 2020 (-778,137 thousand US$), a partial recovery in 2021, and another substantial decline by February 2022 to 498,399 thousand US$.

Invested Capital and Cost of Capital

Invested capital saw a substantial expansion between 2017 and 2019, peaking at 24,890,124 thousand US$. From 2020 onward, a gradual contraction of the capital base occurred, with invested capital declining to 20,491,900 thousand US$ by 2022. The cost of capital remained relatively stable, fluctuating within a narrow range between 13.94% and 16.02%, ending the period at its highest point.

Economic Profit Trends

Economic profit was negative for the majority of the timeframe, with the only exception occurring in February 2019, when a positive value of 484,748 thousand US$ was recorded. The most severe destruction of economic value occurred in February 2020, where economic profit plummeted to -3,815,976 thousand US$, driven by the combination of negative NOPAT and a high capital charge. Despite a reduction in invested capital in subsequent years, economic profit remained negative, ending at -2,784,462 thousand US$ in 2022.

The overall trend indicates that the company failed to maintain a sustainable spread between its return on invested capital and its cost of capital. The volatility in NOPAT appears to be the primary driver of the fluctuations in economic profit, as the cost of capital and the invested capital base remained more predictable in their movements.

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 financial performance over the six-year period ending February 28, 2022, is characterized by significant volatility in value creation and a general inability to consistently exceed the cost of capital. Economic profit remained negative for five of the six years analyzed, indicating that the returns generated were insufficient to cover the imputed cost of the capital employed.

Economic Spread Ratio Analysis

The economic spread ratio exhibited extreme fluctuations, signaling inconsistent capital efficiency. A marginal improvement was noted between February 2017 (-4.41%) and February 2018 (-4.31%), followed by a peak in February 2019, where the ratio turned positive at 1.95%. This represents the only period within the timeframe where the company generated a return above its cost of capital. However, this was followed by a sharp decline to -17.51% in February 2020, the lowest point in the series. While a partial recovery occurred in February 2021 (-3.09%), the ratio deteriorated again to -13.59% by February 2022.

Economic Profit and Capital Utilization

Economic profit mirrored the volatility of the spread ratio, with a stark contrast between the positive result of US$ 484.7 million in 2019 and the substantial losses in 2020 (US$ -3.82 billion) and 2022 (US$ -2.78 billion). Invested capital peaked in February 2019 at approximately US$ 24.89 billion, coinciding with the period of positive economic profit. Following this peak, invested capital entered a gradual downward trend, decreasing to US$ 20.49 billion by February 2022. The contraction in the capital base did not correlate with an improvement in the economic spread ratio, as the most severe losses occurred after the capital base began to shrink.

Overall Value Creation Trend

The data indicates a pattern of value destruction for the majority of the observed period. The recurrence of deeply negative economic spread ratios in 2020 and 2022 suggests that the company faced significant challenges in optimizing its invested capital relative to the required rate of return. The inability to sustain the positive momentum achieved in 2019 highlights a lack of stability in the company's economic value added performance.

Analysis of the financial performance from February 2017 to February 2022 reveals a significant divergence between revenue growth and economic value creation. While adjusted net sales exhibited consistent year-over-year growth, expanding from 7.33 billion US dollars in 2017 to 8.94 billion US dollars in 2022, the ability to generate returns exceeding the cost of capital remained inconsistent and predominantly negative.

Economic Profit Margin Trends

The economic profit margin demonstrated extreme volatility throughout the period. The margin remained negative for five of the six years analyzed, with a notable exception in February 2019, when it reached a peak of 5.97%. This positive outlier was followed by a severe contraction to -45.74% in February 2020, marking the lowest point in the series. Although a partial recovery to -7.63% was observed in February 2021, the margin declined again to -31.15% by February 2022.

Economic Profit Volatility

Economic profit remained predominantly negative, indicating that the company generally failed to create economic value. The losses were most pronounced in February 2020 and February 2022, where economic profits fell to -3.82 billion and -2.78 billion US dollars, respectively. The only instance of value creation occurred in February 2019, when the company recorded a positive economic profit of 484.75 million US dollars.

Correlation Between Sales Growth and Value Creation

A persistent gap is observed between the steady upward trajectory of adjusted net sales and the erratic nature of economic profit. The lack of a positive correlation between increasing sales and economic profit suggests that the costs associated with capital investment or the weighted average cost of capital consistently outweighed the operational gains during the majority of the analyzed timeframe.