Morningstar - Q4 2020 - 19

Clorox Forecast We foresee steady sales and profit gains.
Sales

Operating Margins

$15,000M

35%
30

10,000
6,855

7,088

7,391

7,676

7,977

8,608

8,283

9,301

8,954

9,662

25

5,000

20.1

0

20
15

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Source: Morningstar.

Constellation Forecast We see a strong long-term growth trajectory.
Sales

Operating Margins

$15,000M

34.6 35%

10,000
7,738

8,272

8,805

9,365

9,891

10,371

10,876

11,363

11,873

12,408

30
25

5,000
20
15

0
2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Source: Morningstar.

Clorox Is Overpriced Constellation Brands is the better value today.
Name

Price ($)

Fair Value ($)

P/FV

Morningstar Rating

Clorox CLX

210.17

154.00

1.36

Q

Constellation Brands STZ

189.51

226.00

0.86

QQQQ

Source: Morningstar Direct. Data as of 09/30/2020.

as lofty, implying a level of perfection with which we
are uncomfortable.
Our $154 fair value estimate is buttressed by
our expectations for 3% to 4% annual sales growth
(essentially balanced among the benefits from

increased volume, higher prices, and favorable
mix). We expect about 140 basis points of gross
margin improvement, relative to the average
of fiscal 2016-20, amounting to 45.4% by the end of
the next 10 years. We forecast 150 basis points
of consolidated operating margin expansion to just

more than 20% by fiscal 2030. But against our
more tempered outlook relative to the recent
past, we believe the shares fail to offer investors
an attractive risk/reward opportunity, as
they are trading at about a 40% premium to
our valuation.
For investors looking to add consumer products
to their shopping carts, we'd suggest wide-moat
Constellation Brands STZ instead. We think
the market continues to place disproportionate
weight on peripheral issues without fully
appreciating the earnings power of Constellation's
Mexican beer business (which represents
roughly 80% of profits) and the structural barriers
to entry that make the firm's positioning difficult
to replicate.
Even before COVID-19, Constellation's shares waned
as investors became increasingly skeptical of
the firm's venture investment in no-moat cannabis
company Canopy Growth CGC and concerned
about regulatory hurdles for its wine and spirits
divestiture. We consider these issues transitory and
not particularly material over the long term. More
recently, while the ultimate scope and duration
of the coronavirus impact remain indeterminable,
we believe the current stock price implies a
sustained shift in the trends that have buoyed the
firm's beer portfolio, which is extremely unlikely,
in our view. Moreover, roughly 85%-90% of
its business is off-premises compared with our
estimate of 75%-80% for the industry. Consequently,
Constellation is holding up fairly well relative to
other brewers with greater exposure to restaurants,
bars, and such.
We believe there is compelling value in the
shares at current levels relative to our $226 fair
value estimate. Our valuation is underpinned
by normalized top-line growth in the midsingle
digits (at the lower end of management's target)
and core beer operating margins expanding
modestly to the mid-30s by the end of our 10-year
explicit forecast.
Erin Lash, CFA, is director of consumer equity research
with Morningstar.

morningstar.com/lp/magazine

19


http://www.morningstar.com/lp/magazine

Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020

Contents
Morningstar - Q4 2020 - CT1
Morningstar - Q4 2020 - CT2
Morningstar - Q4 2020 - Cover1
Morningstar - Q4 2020 - Cover2
Morningstar - Q4 2020 - 1
Morningstar - Q4 2020 - 2
Morningstar - Q4 2020 - Contents
Morningstar - Q4 2020 - 4
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Morningstar - Q4 2020 - Cover3
Morningstar - Q4 2020 - Cover4
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