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Constellation Brands Inc. (STZ) is the largest multi-category producer of beer, wine & spirit products in the United States. The company sells alcoholic beverages to consumers through two reportable revenue segments: beer, wine & spirits. Their beer segment is the third largest beer operation in North America and consists mostly of their Mexican beer portfolio and craft beers. Their wine & spirit segment sells premium alcohol products in niche markets.

We recommend a buy rating for Constellation Brands because we believe the company is well positioned to take advantage of consumer trends in the alcoholic beverage industry due to its market share dominance in the imported beer business, excellent operating margins in its product segments, and corporate strategy of acquiring strong alcohol brands with loyal consumer bases.

Drivers of Thesis

• We forecast revenues to grow at 7.6% driven by unit sales growth of 7.3% in their beer segment and 3% in their wine & spirit segment

• The firm’s 48% stake in the imported beer market translates to higher profits as imported beers continue to experience double digit growth in the U.S.

• We expect Constellation Brands to continue holding high operating margins and returns on invested capital in their product segments due to their low-cost advantages in manufacturing, producing, and distributing alcohol products

• Recent trends toward premium products in the wine & spirit industries will allow the company to raise prices and achieve higher revenue

Risks to Thesis

• Growth assumptions are heavily tied to Constellation Brands realizing consumer trends in its Mexican beer segment

• New marketing campaigns may not materialize into increased revenue for beer and premium wine & spirit products

Constellation Brands (STZ) Consumer Staples – Alcoholic Beverages

Krause Fund Research Spring 2018

April 17th, 2017 Stock Rating:

Ethan Eiler Michael Gerot Ethan-Eiler@uiowa.edu Michael-Gerot@uiowa.edu

Alanson Tobias Alexander Quist Alanson-Tobias@uiowa.edu Alexander-Quist@uiowa.edu

STRONG BUY

Investment Thesis

Target Price: $245-$255

Company Description

Earnings Estimates

Analysts

Stock Performance (Last 12 Months)

Source: Bloomberg Terminal

Source: Yahoo Finance

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Real Gross Domestic Product (GDP)

Source: Bureau of Labor Statistics1 Gains in U.S. real GDP growth will sustain Constellation Brands’ long-term growth rate because positive movements in real GDP growth represent increases in consumer spending in the U.S. economy. Personal consumption accounts for approximately 68.9% of real GDP1. The economy is fueled by the products consumers decide to buy, which is dependent on consumer preferences. Constellation Brands profits from consumer spending as their products are distributed in retail and store locations that bring in millions of consumers each year. When more consumers are spending their personal income on goods in the economy, traditional consumer product companies earn more money. The most recent forecast for real GDP indicated that real GDP growth is expected to rise to 2.9%2. As a result, consumer spending is projected to rise in the future and lead to an increase in sales for companies in the consumer staples industry. More conservative estimates of long-term real GDP growth from private-sector economists’ average around a rate of growth of 2.2%3. We chose to use this more conservative estimate of 2.2% long-term growth in GDP as the driver of our economic thesis because we believe it more accurately reflects long-term trends in productivity. We used this 2.2% estimate of real GDP to reflect the long-term growth rate that Constellation Brands can expect to achieve when calculating the continuing value of its free cash flow into the future.

Consumer Price Index (CPI)

Source: Bureau of Labor Statistics1

Rising consumer price index changes will allow Constellation Brands to increase prices onto the consumer as the year over year change in the price of other consumer products increases. As Constellation Brands increases the prices of their products, the company’s revenue will increase. Recent estimates from the Bureau of Labor Statistics suggest that the Consumer Price Index has risen 2.1% so far in 20184. In the graph above, inflation has continued to rise every year since 2015. We used this estimate as the rationale for growing the purchasing price of Constellation Brands’ products by at least 2.0% each year. Our analysts reason that an annual 2.0% increase in the price of Constellation Brands’ products prevents the company from losing revenue to inflationary periods. The 2% increase in inflation all plays into our thesis because we believe that premium product demand will continue to grow as consumers will be willing to pay for pricier products. We used this 2% estimate to grow our year over year price for the average wine & spirit case to also capture higher prices that will occur as more consumers want premium alcohol.

We also examined the Purchasing Managers’ Index to assess the degree inflation will affect the input prices for materials that Constellation Brands uses to produce products. The prices sub index in the Purchasing Managers’ Index (PMI) rose 3.9% to 78.1% in March5. The increasing PMI demonstrates that Constellation Brands may pay higher prices for their input prices as this net inflationary trend continues. We think Constellation Brands will be able to address this potential increase in input prices by increasing their product price with the current trend of premiumization and hedging their raw material costs.

Economic Outlook

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Forecasted Prices of Wheat

Source: Bloomberg Commodity Prices27

The graph above shows the median consensus forecasts for global wheat. The price of wheat is expected to stay approximately the same for the next three years and increase slightly the two years afterwards. Wheat is a major input to produce beer and whiskey. Although a rise in the price of wheat would be a risk to Constellation Brands, we do not expect wheat prices to rise substantially within the next five years. We used this assumption in the valuation model to predict cost of goods sold to stay as a constant percentage of sales. Forecasted Prices of Corn

Source: Bloomberg Commodity Prices27

Corn is a major input for the beer and spirits segment of Constellation Brands. Above is the median consensus forecast prices for corn. We can see that corn is not expected to rise more than 5.0% in the next five years. Corn prices have been constant for the past few years and changes occur from either an increase in the price of oil or a decrease in the supply of corn. Although rising corn prices represent a major threat to operating expenses, we do not expect corn prices to rise enough in the next few years to affect the operating profit of the company. We used this assumption in the valuation model to predict cost of goods sold to stay as a constant percentage of sales.

Forecasted Prices of Aluminum

Source: Bloomberg Commodity Prices27

Aluminum is one of the two major inputs for packaging Constellation Brands’ beer products. Aluminum prices represent an operational risk as their increase in prices could cause a large increase input costs. As of April 16th, the price of aluminum is $2,285 per metric ton27.This price is expected to fall about 7.0% within one year and gradually increase to $2,230 per metric ton27. From this information, we expect the price of aluminum to stay relatively constant for the next 5 years. Additionally, hedging assets owned by Constellation Brands also mitigate the risk of an increase in aluminum prices. Due to these reasons, the forecasted prices of aluminum did not affect our decision of when keeping costs of goods sold constant in our model.

Currency Effects of the Mexican Peso

Source: Exchange Rates6 The value of the Mexican peso represents a currency risk to Constellation Brands as 80% of the company’s input materials are bought in Mexico7. The Mexican peso is forecasted to continue to appreciate to 18 pesos per U.S. dollars by the end of the year for 2018. The peso started November of 2017 at 19.10 per dollar and has appreciated to 18.19 per dollar as of April 12th (6). Although we see the

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Mexican peso as a potential risk to Constellation Brands, we are confident its increasing value will not drastically affect the purchase of their raw materials because the company hedges 60% of their supplier contracts against the currency7.

Target Markets

Source: Pew Research Center9

One of Constellation Brands’ largest target consumers is the Hispanic population7. This demographic buys more Mexican beer products than other demographics in the United States8. The increasing Hispanic population in the United States will continue to fuel Constellation Brands’ sales volume growth. By 2050, the Hispanic population is projected to reach 106 million9. In addition, the Hispanic population is expected to grow 2% annually into the next ten years and we expect this population growth to continue fueling the growth in Constellation Brands’ product sales9. For this reason, we decided to include the forecasted growth of the Hispanic population as one of the components of our beer unit growth rate in our model. We believe it will continue to offer a sustainable growth rate with loyal consumers. Historically, Constellation Brands’ most successful markets have been in Hispanic communities.

The increasing purchasing power of the millennial population will also fuel sales growth into the future. In 2019, the millennial population is forecasted to hit 73 million people and surpass the baby boomer population in size10. With this new increase in purchasing power, millennials will have more control over the trends in our consumer driven economy. The recent trends in the alcoholic beverage industry towards product premiumization are complemented by the increasing millennial population and their purchasing power. The increasing millennial population demands product differentiation that Constellation Brands meets through its

premium beer, wine, and spirit products. The millennial population has been one of the largest buyers of imported beers in the United States.

Source: Pew Research Center Projected Millennial Population10

The alcoholic beverage industry is a subsector within the beverage industry. Soft drinks account for 82.0% of the beverage industry, while the other 18.0% is made up of alcoholic beverages. With this 18.0% stake, the alcoholic beverage industry contains a total market value of $235 billion and can be further broken down into two subsectors: 1) Distillers and Vinters and 2) Brewers. Distillers and Vinters account for 14.0% of the market capitalization while the other 4.0% is made up of brewers11. Constellation Brands competes with companies in both subsectors through the sale of their beer, wine, and spirit products.

Sales Volume

Source: CFRA S&P Global Beverage Industry Survey11

Beer dominates the alcoholic beverage industry when examining products on a per unit basis. Within the alcoholic beverage industry, beer makes up 82.8% of total volume sales and wine and spirits make up the other 17.2% in the United States11.

Industry Analysis

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Revenue Volume

Source: CFRA S&P Global Beverage Industry Survey11

Although beer sells the most products by unit in the industry, increasing prices for premium alcohol lowers the revenue share beer has in the alcoholic beverage industry. In 2016, beer’s market share in revenue in the U.S. fell to 47.0%, while spirits climbed to 35.9% and wine to 17.1%11. The share of revenue coming from distilled spirits increased last year, due to companies’ continuous product innovations and consumers’ continued interest in premium distilled spirits11. In the U.S., alcoholic beverages are a big business. In 2016, retail sales of alcoholic beverages reached $225.4 billion, up 2.4% from $220.1 billion in 201511.

Competitive Positioning

The leaders in the alcoholic beverage industry consist of mature life cycle companies that are not normally positioned for dramatic increases in growth. Constellation Brands is an exception to these other companies due to the increased popularity of its brands in the beer, wine, and spirit segments. When conducting our industry analysis, we decided to define Constellation Brands’ industry impact to the geography of North America since 97.0% of their sales come from the U.S. and 3.0% of their sales come from Canada7. The following graph represents Constellation Brands’ market share positions in total units sold in North America in the beer industry for 2017. We analyzed Constellation Brands’ total sales volume as a percentage of the total market compared to their peers in the beer, wine, and spirits segments.

Beer Industry

Source: Euro monitor International Passport Data (Beer)12

In the beer industry, we identified Anheuser Busch and Molson Coors as the two greatest competitors to Constellation Brands. Constellation Brands contains the third largest market share by revenue in North America. As shown in the graph above, Anheuser Busch is the leading beer brand in North America, followed by Molson Coors. Combined, these two brewers represent 70.6% of unit sales in North America12. Constellation Brands’ position in North America is impressive considering that Constellation Brands does not own any of the top ten beer brands in the United States based on units sold. Their market share in the beer industry comes exclusively from the success they have experienced with their Ballast Point and Mexican beers. In comparison, Anheuser Busch’s and Molson Coors’ market share has been created by the storied success of traditional beer brands like Coors Light, Bud Light, Busch Light, and Budweiser. These light beer categories have recently been losing market share to Mexican light beers that Constellation Brands owns such as Modelo Especial and Corona Extra.

Change in Operating Income & Gross Profit for 2017

Source: Molson Coors 10-K 2017 Part 1.13 Constellation Brands 10-K 2017 Part 1.7 Anheuser Busch Annual Report 2017 p.g. 4814

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Source: IBIS World US Industry Reports – Breweries– Major Companies15

Source: IBIS World US Industry Reports – Breweries– Major Companies15. SEC EDGAR Constellation Brands 10-K 20177. When analyzing the growth rates of Anheuser Busch and Molson Coors, our analyst team believes that Constellation Brands is positioned to gain greater market share than both companies due to the popularity of its brands. Our recent analysis of Anheuser Busch shows that the company experienced total volume decreases in North America last year of 3.3%14. While Anheuser Busch does own 10 craft beer brands in the North American region, their North American craft beer portfolio only grew .45% in market share when comparing based on units sold in 201714. In addition, their Budweiser brand lost 0.40% of the company’s total market share in 2017 and their Bud Light brand lost 0.85% of the company’s total market share14. The sum of these market share changes equals a .80% decrease in market share and a potential loss of revenues of $467 million14. Like Anheuser-Busch’s experience, Molson Coors also experienced decreasing market share of 1.0% last year. In contrast, Constellation Brands experienced an increase of $606.7 million in net

beer sales purely off the growth of Ballast Point and their Mexican beer portfolio.

Constellation Brands’ main competitor in their craft brewing business is the Boston Beer Company. The Boston Beer Company brews Samuel Adams beer varieties and is the largest independently owned craft beer company in the United States. Our analyst team sees the Samuel Adams beer varieties as the largest direct competitor to the company’s craft beer portfolio since the Boston Beer Company can use the same economies of scale Constellation Brands uses in its distribution and production system. Although the Boston Beer Company is a threat to Constellation’s Ballast Point brand, we see Constellation Brands adding value to their operations by increasing the distribution presence of their light Mexican beers. Constellation Brands’ craft beer segment has not experienced the rapid growth that the Mexican beer portfolio has enjoyed in the last two years.

Wine Industry

Source: Euro monitor International Passport Data (Wine)12

We believe Constellation Brands will grow its position within the North American wine industry by building its focus brands and acquiring competitors. Constellation Brands’ largest competitors in the wine industry are the E & J Gallo Winery and the Wine Group. These two companies are private companies that do not report data to the SEC. For this reason, we decided to compare Constellation Brands’ competitive position within the wine industry by comparing popular brands and their related sales volume. Although Constellation Brands holds the second largest market share in North America, they only own one of the top ten selling wine brands.

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Most Popular Wine Brands by Sales & Growth in 2017

Source: CFRA S&P Global Beverage Industry Survey11

The graph above demonstrates that Constellation Brands is well positioned to benefit from recent premiumization trends in the wine industry. Competition within the wine industry is divided into two different strategies. For companies producing bulk wines, different organizations compete based on price and value. For companies producing premium wines, producers focus more on quality and branding. The Wine Group and E & J Gallo Winery contain large market share in the bulk wine businesses. When comparing their bulk wine sales to Constellation Brands, both companies own brands which sell more in the United States. However, we believe the wine industry represents a great growing opportunity for Constellation Brands. The company has continued to rally behind new focus brands like Meiomi, Ruffi, and Kim Crawford that have built Constellation’s wine portfolio from the original increases in sales growth caused by the Robert Mondavi brand. These brands will be able to outcompete the bulk wines of the Wine Group and E & J Gallo Winery due to recent trends in premiumization. Our research team also finds the decreasing trend of the Franzia Winetaps brand to represent the overall consumer shift towards premium products as millennials are wanting to try more personalized products15.

Source: IBIS World US Industry Reports – Wineries – Major Companies15

Source: IBIS World US Industry Reports – Wineries – Major Companies15 Note: Our analysts could not find industry data on The Wine Group’s operating income The graphs above illustrate that Constellation Brands financially outcompetes other companies in the wine producing industry. Their operating margins are the highest when comparing their performance to their largest competitor (E & J Gallo Winery). The company is larger than the Wine Group, and we believe that it will be able to continue to take market share away from companies in the wine industry because of the strength of the new portfolio brands it acquired in 2016. When conducting our industry analysis, we concluded that comparing Constellation Brands to these two other wine producers would present the most accurate representation of the industry because the Wine Group, Constellation Brands, and E & J Gallo Winery make up 43.4% of the industry based on revenue15. The operating margins of Constellation Brands are particularly impressive as the company competes with the Wine Group and E & J Gallo Winery in both the bulk wine and premium wine business segments. As long as Constellation Brands continues to hold the same operating margins, we believe their new growth will help their bottom line15.

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Spirits Industry

Source: Euro monitor International Passport Data (Spirits)12

Constellation Brands’ weakest market exposure is in the spirits industry in North America. Compared to other reputed liquor brands, Constellation Brands sees most of its organic growth from selling its Svedka brand. Although Svedka is one of the most popular brands in the United States, Constellation Brands’ spirits sales are dwarfed compared to the size of Diageo PLC and Sazerac Co. Svedka is the second most popular vodka brand in the United States with 4,355 case sold in 201611. Interestingly, recent discussions by management have focused on creating new spirit products that appeal to the millennial population7. Our team of analysts do not see Constellation Brands making significant increases in revenue from these new products in their spirits segment.

Source: IBIS World US Industry Reports – Distillers – Major Companies15.Constellation Brands’ 10-K 2017 Item 1 Management’s Discussion of Financial Performance. From the graphs above, our analysts do not believe that Constellation Brands will be able to penetrate the spirits industry to the degree of its success in the beer and wine industries. We think the competitive footing Diageo PLC, Brown – Forman, and Beam Suntory Inc. hold represent large barriers of entry for Constellation Brands to succeed in the industry because of consumer loyalty. Although we do not see Constellation Brands gaining large amounts of market share in the spirits industry, we are confident that their management team knows their greatest strategic advantages lie in gaining market share in the beer and wine industries.

Source: Bloomberg Terminal

Source: Bloomberg Terminal

We prepared the graphs above to analyze Constellation Brands’ largest publicly traded competitors. When considering the financial performances of these companies, we discovered that Constellation Brands outperforms all its competitors when comparing ROIC, ROE, and ROA except for the Brown Forman Corporation.

Source: IBIS World US Industry Reports – Distillers – Major Companies15.

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We found this to be an impressive feat considering Constellation Brands achieves these numbers operating in three different product segments that each contain different product, manufacturing, and distribution systems. Porter’s Five Forces Threat of New Entrants: Low Mature companies in this industry prevent new entrants from grabbing sizeable amounts of market share. Most new entrants in the industry are already acquired or bought out by companies like Constellation Brands when they find their niche market. Much of the M&A activity within the industry focuses on using these markets to further fortify their financial position. Constellation Brands is a unique example as not many other companies in the alcoholic beverage industry act as a multi-category seller. The threat of new entrants consists of small craft beer operations, wine distributors, and premium spirit makers. Unlike other industries, the recent trends in the alcoholic beverage industry have created a vast variety of small alcohol operations that have slowly eroded the market share enjoyed by large beer companies. So far, Constellation Brands has benefited from this shift in preferences by profiting off its Mexican beer imports. Instead of directly challenging mature companies in the industry through competitive pricing and corporate strategy, new entrants pose the greatest threat to companies in the alcoholic beverage industry by eroding their market share by hundredths and thousandths of percentage points. Individually, one small company selling a beer like Modelo or Ballast Point will not significantly affect Constellation Brands’ bottom line. Instead, Constellation Brands market share is threatened the most when thousands of small companies produce their own products that are like their craft beer component. Competitive Rivalry Beer Industry: High The largest segment of Constellation Brands’ revenue comes from their beer business. Competition in the beer business is extremely competitive with many of the large brewers vying for the competitive pricing power of entire nations. Companies like Heineken, Molson Coors, and Anheuser-Busch all contain large operating segments outside of the U.S. in Europe, Asia, and Latin America16. In comparison, Constellation Brands receives 97.0% of its revenues from the U.S. and 3.0% from Canada7. Considering this international difference, the threat of competitors in the beer industry is high for Constellation

Brands in foreign markets. Constellation Brands’ recent success from their beer segment resulted from their exclusive rights to sell Mexican beers like Pacifico and Modelo that have risen in popularity in the U.S. market17. Competitive Rivalry Wine & Spirits Industry: Medium The wine and spirit business segment generates 42.3% of Constellation Brands total revenues7. Most of the comparable wine producers and distributors mentioned in Constellation Brands’ 10-K as direct competitors are not publicly traded. Wine distributors like Trinchero Family Estates include 47 different brands of wine and spirits in their brand portfolios17. Most of Constellation Brands competitors in the wine industry are private companies with premium brands with loyal followings. Constellation Brands is the leading premium wine company in the world by brands offered and outperforms its competitors in the wine & spirits industry due to its higher operating margins. Although Constellation Brands offers a higher number of brands and displays high operational efficiency, the company is still affected by consumer loyalty. Although brand companies can never escape the risk of losing consumer loyalty, Constellation Brands’ operating margins help them ensure they will remain profitable. Bargaining Power of Suppliers: Low The two most expensive materials to supply production are grapes and glass respectively. Constellation Brands buys their grapes from numerous independent growers in California, Italy, and New Zealand7. We know that the bargaining power of suppliers is low in the wine industry because companies buy from a large pool of individualized growers in a decentralized system. Unlike other commodities which have not been crafted, the supply of grapes for premium wine is provided by small growers that have little market share. Constellation Brands owns the largest in-house glass producing facility in North America11. The company uses this glass producing facility for their Mexican beer portfolio and does not bottle for other companies within the industry. Since they own this facility, the bargaining power of glass suppliers is extremely low for their business. In the beer segment, Constellation Brands is also subject to adjusting to changes in the supply of corn starch, wheat, aluminum, and water11. Companies like Anheuser-Busch limit the bargaining power of suppliers by vertically integrating their malting process to reduce their operational expenses. Supplies of feed and malt barley also rely on trade regulations like the North American Free Trade Agreement (NAFTA) 11. These trade agreements help

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increase competitive pricing between corn and wheat suppliers on the North American contract. We believe that the regulations have kept the bargaining power of suppliers low in the beer brewing industry. Threat of Substitutes: High The craft beer, premium wine, and spirit markets of the U.S. offer thousands of products catered to the specific preferences of consumers. The best example for Constellation Brands is found in the Modelo beers. In the U.S., a large portion of Constellation Brands’ increased earnings came from their Mexican beers. Constellation Brands profited from the sale of Modelo beers because changing consumer preferences in the U.S. demanded more imported beers. The Ballast Point segment of Constellation Brands also has a high threat of substitutes because craft beer accounts for 22.0% of the $107.6 billion U.S. beer market and grew 6.2% last year11. With a large market built around the idea of personalizing to the tastes of the consumer, customers can choose from thousands of different beers that may also satisfy their desires for craft beers. Like the beer industry, the premium wine and spirit industries consist of thousands of different brands. Premium wine sales in 2018 are expected to increase between 10.0% and 14.0%11. With thousands of options, other companies in the alcoholic beverage industry can create products that offer the same benefits to the consumer as their original product. Bargaining Power of Buyers: Moderate Companies in the alcohol beverage industry sell to wholesalers, retailers, and clients in on premise locations. Many of these companies earn their revenue with sales to wholesalers. We think that wholesalers display their bargaining power by responding to consumer trends and by providing the distribution of their products to merchants. Industry Trends Increasing Consumption of Mexican Beer The beer industry has seen an increase in demand for Mexican beers in the United States from 2009 to 2016. Since the end of the last recession, Mexican beers have increased volume by 4.4 percentage points per year9. This is compared to U.S. domestic beers volume decreasing by 3.7 percentage points per year, British imports volume down by 0.2 percentage points per year, and Canadian imports down by 0.1 percentage points per year19. The

cause is twofold. One, import beers are becoming more popular in the United States. Import beers have seen an increase of 6.4% in unit sales growth in 201719. New customer preferences for Mexican light beers and craft beer products increase the market share for craft beer companies while taking away market share from traditional brewers like Anheuser-Busch and Molson Coors. The craft beer category increased its consumption share from 8.5% in 2014 to 9.8% in 2015 to 10.4% in 201611. With these figures in mind, we believe that Constellation Brands is going to continue to benefit from increases in craft and premium beer market share due to their Ballast Point brands and Modelo beers. Decreasing Beer Market Share in the U.S. (by Revenues)

Source: Molson Coors 10-K 2017. Item 1. Anheuser-Busch – InBev 10-K 2017.

Source: CFRA S&P Global Beverage Industry Survey – Page 23

The first table above represents the shrinking market unit sales share Molson Coors and Anheuser-Busch have experienced in the last four years. Our analysts believe this trend will continue as millennials prefer light beers like the ones produced by Constellation Brands.

The second table shows the top ten most popular beer brands in the United States based on units sold. Each of these ten brands experienced declining growth except Michelob Ultra. Examining this evidence showed our research team that the changing consumer preferences are affecting the leading brands in the beer industry at an alarming rate.

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Increasing Market Share of Premium Alcohol

Adding to the graphs we displayed above, consumers are continuing to look to premium alcohol products to meet their preferences. Last year, the volume of units sold in the high-end and super-premium segments rose 5.5% and 10.8% respectively11. We believe this significant growth in the super-premium segments will benefit the wine & spirit segment of Constellation Brands as they focus on bringing new premium products that charge higher prices. We will touch on this point later in the report.

Corporate Strategy

Constellation Brands’ corporate strategy focuses on capitalizing on different industry trends in the wine, beer, and spirits industries. In the next five years, the company plans to capture higher profits by increasing sales volume and favorable pricing in its beer and wine & spirits segments. In their beer segment, Constellation Brands is well positioned to grow off the popularity of craft and import beer in the United States due to their production facilities in Mexico and San Diego. The company started this strategy for their beer segment in 2013 with what they call the Big Beer Acquisition. This acquisition gave Constellation Brands the exclusive rights to sell Mexican beers like Corona, Modelo, and Pacifico. Since this acquisition, the company’s beer strategy has revolved around their ability to capture market share in the high-end beer segment and increase beer production capacity. Constellation’s wine & spirits segment will organically grow its revenue by increasing the price of its products and building out its focus brand portfolios. In addition to creating pricier products in their wine and spirits segment, Constellation Brands also pursues acquisitions to improve margins, enhance production capabilities, and capture market share in the premium wine market.

M&A Activity

Source: Constellation Brands 10-K 2017.7

Constellation Brands’ most recent M&A activity demonstrates how Constellation Brands has executed on their corporate strategy to increase their margins and follow consumer trends. In their beer segment, Constellation Brands captured more production capacity with their Obregon Brewery acquisition. The company also acquired Funky Buddha Brewing to further diversify their revenue stream and gain market share in the Florida craft beer market. The acquisition of the glass production plant also helped Constellation Brands increase their margins due to the favorable effects of glass sourcing. The combination of these three highlighted acquisitions prove that management is pursuing strategies to maintain Constellation Brands’ margins while also pursuing growth. In their wine & spirits segment, Constellation Brands has followed similar patterns by acquiring premium wine and spirit brands that push higher prices onto the consumer. The acquisitions of the Prisoner, Meiomi and Casa Noble brands demonstrate that management’s primary concern is finding pricier brands that consumers love. We see this helping Constellation Brands grow revenue by letting them charge consumers higher prices. It is also worth noting that Constellation Brands divested from their Canadian wine business due to lowering margins. We see this divestiture as a positive sign for shareholder because it signals the dedication management has for keeping high operating margins.

Company Analysis

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Segment Margins & Product Streams The following section of this report breaks down Constellation Brands’ business by giving a visual presentation of their segment performance in the last three years by explaining the different product streams Constellation Brands uses to generate revenues. Operating Margins Continue to Increase

Source: Constellation Brands 10-K 2016 & 2017.7

Unit Sales Growth for Beer & Wine Increases

Source: Constellation Brands 10-K 2016 & 2017.7

Segment Revenues Continue to Increase

Source: Constellation Brands 10-K 2016 & 2017.7

Beer Segment

Constellation Brands’ beer segment will increase revenue by focusing on increasing margins and building the company’s production capacity. Net sales grew 10.0% in their beer business for their most recent fiscal year7. In addition, the operating margins for their beer segment increased 1.4% to 36.3% in total7. This is the best operating margin out of all large-scale North American brewers14. The increases in net sales in Constellation Brands’ beer segment are mainly due to the success of their Mexican beer portfolio. For fiscal year 2017, two thirds of their $606.7 million increase in net beer sales came from their Mexican beer portfolio, while 20.5% of this net sales increase came from their Ballast Point Brand7. Organic growth rate for sales volume is at 11.0%. Capital expenditures related to the Mexico beer expansion projects are estimated to be approximately $3.9 billion through fiscal 2021. In total, they have invested

approximately $2.1 billion for the Mexico Beer Expansion Projects, with approximately $700 million during Fiscal 20177. We see the culmination of these recent moves in their beer business as a net positive. Understanding their beer segment led our analysts to believe that Constellation Brands will be able quickly grow while keeping their margins tight. This was an important assumption to make because without their superior margins, Constellation Brands would not be an industry leader.

Wine & Spirits Segment

The wine & spirits segment will continue to grow revenue by matching consumer demand with higher priced products. The increases in net sales in Constellation Brands’ wine segment are mainly due to the success of their premium Meiomi and Prisoner brands. In their wine & spirit segment, $124 million of their increase in net wine sales was due to their Meiomi and Prisoner brands, while $95.9 million was due to organic brand growth7. The company can out compete its competitors by increasing premium wines or spirits in the market, while decreasing the cost of goods sold, and taking advantage of their geographic presence in Mexico giving a foreign currency benefit to Constellation Brands. From this we have assumed a 3.0% growth rate in the wine and sprit segment. This growth comes from premiumization trends in the millennial population and brand acquisitions.

Constellation Brands’ net sales growth in the wine segment was 5.0%7. The improved growth rate was mainly due to organic volume growth of 3%. They also increased their operating margin 1.0% to 25.8%7. Constellation Brands sells many wine brands around the world. They have a portfolio of 100 brands of wine which are separated into popular, premium and luxury categories. The price range usually varies between $5 and $25 per bottle7. Their wine is primarily marketed in the U.S. In addition, they export their wine products to Canada and other major world markets. In their spirits business, Svedka Vodka is imported from Sweden and is the largest imported vodka brand in the U.S. Black Velvet Canadian Whisky is the second-largest Canadian whisky brand in the U.S. Their high-end spirits brands include Casa Noble tequila and High West craft whiskeys. Spirits net sales growth was like the wine segment. It grew at a 5% rate7. This was also mainly driven by an increase in the volume growth for the spirits segment. The operating margin also decreased in-line with the wine segment. This increase in operating margin was due to a decrease in cost of goods sold,

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favorable pricing, and foreign currency benefits7. We can see that these trends will most likely continue in the next 5 years. So, we have estimated that the spirits segment will increase by the same amount as wine. Constellation Brands’ best avenue for success in their wine & spirit segment is increasing the prices of their premium products to compete in niche markets.

Production and Distribution

Manufacturing

Source: Constellation Brands 10-K7

The map above displays the most important breweries, wineries, and manufacturing facilities related to Constellation Brands. The three wineries in California produce 75.0% of their U.S. production. Constellation Brands’ in-house manufacturing facilities in Mexico and California give their beer segment a competitive advantage in cost. Last year, 80.0% of the Mexican Beer Brands were produced by the Nava Brewery, which is in Mexico, approximately 10 miles from Texas7. The Obregon Brewery also increases Constellation Brands’ production capacity for beer. To protect themselves from adverse fluctuations in the relationship between the U.S. dollar and the Mexican Peso, Constellation Brands hedges 60.0% of the currency risk21.

The Canadian whisky production for Black Velvet is completed in Alberta and imported into the United States. The Svedka brand is also imported into the United States. The Florida location for Funky Buddha Brewing is Constellation’s newest brewing location. The Canandaigua Winery represents another hub for Constellation’s wine production.

We believe Constellation’s manufacturing locations and scale are the number one reason why they have sustained such high margins. Our analyst team believes that their strategy of acquiring the rights to numerous brands and producing them in central locations works well with their distribution model. When producing these different brands in the same facilities, Constellation Brands can realize cost synergies in cost of their input materials, labor, overhead costs, and other operating expenses.

Distribution

Constellation Brands’ distribution network enhances their manufacturing process because they lease distribution centers instead of owning them. Our team believes this is advantageous for their company because they can leverage the network they have with their 29 different distributors and gain access to other markets in the United States7. Leasing distribution centers is also more cost effective for Constellation Brands as they are not forced to pay large capital expenditures related to improving or updating their distribution facilities. This distribution network is one of the catalysts for the increased sales growth we forecast in our model’s assumptions. The distribution network is separated by beer portfolio and wine and spirits portfolio as well as state alcohol beverage control agencies.

The relationship Constellation Brands’ management holds with their distributors is a major competitive advantage in the alcoholic beverage industry. In addition to supplementing their manufacturing process, Constellation Brands’ distribution network accounts for most of their increases in sales growth. According to their most recent earnings call, Constellation’s management estimates that 50.0% of their sales growth comes from leveraging their connections with their distributors20.

Suppliers & Raw Materials

Constellation’s current contracts with suppliers of their raw materials ensures they will be able to sustain their planned growth. The grape requirements for wine are purchased from independent growers mostly in California, New Zealand, and Italy at differing times of the year. This is the largest expense for Constellation Brands. Packaging materials represent the second largest cost component of production. This includes glass and polyethylene terephthalate (PET). However, Constellation Brands formed a joint venture with Owens-Illinois to create the

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world’s largest glass container manufacturing plant. Other raw materials include water, grain, and yeast.

Analysis of Recent Earnings

Recent earnings announcements demonstrate that the company is on track to continue outperforming peers. Constellation Brands recently released their earnings announcement on March 29th, 2018. In the announcement, the company reported 4th quarter EPS of $1.90 which beat analyst estimates by $0.16 a share21. The company also beat revenue estimates by $20 million21. Constellation Brands’ actual results were much better than consensus estimates and were fueled by the strong portfolio performance of their Modelo and Corona brand families. The Corona brand hit 110 million cases sold in the last ten years in the United States21. Organic sales growth came in at 7.0% and their beer depletion rate came in at 10.0%21. Moving forward, the company is expecting growth in the 9.0-10.0% range in their beer segment and plans to increase their marketing spending as the company continues to grow their distribution channels for their Mexican beers21. To add to their portfolios value, management is also targeting premium trends and plans on creating pricier products through their wine and spirit segments. For 2018, management is guiding that the company will continue to outperform competitors in its beer business and gain market share in the wine and spirits industry through the development of premium products21. Analysts are estimating 1st quarter of 2018 EPS for Constellation Brands to be $2.4822.

Debt Structure

Source: Constellation Brands’ 2017 10-K7

Source: Constellation Brands’ 10-K 20177 Constellation Brands’ debt structure allows the company to continue financing value-added projects and acquisitions without overburdening the company’s cash flows with interest payments. Constellation Brands tends to use their credit facilities to continue to increase their cash balance anytime they experience sharp fluctuations in cash flow or need to cover unexpected expenses. Besides their revolving credit facilities, Constellation Brands also uses term loan credit facilities and senior notes to finance value added projects. The term loans tend to have stricter covenants compared to the senior notes that focus on limiting Constellation’s overall leverage. Besides limiting leverage, these term loans also contain covenants that prevent Constellation Brands from mergers, certain divestitures, and the making of certain investments. The senior notes hold claims to most of the company’s assets like their accounts receivables. They use these term loans to support the financing of new projects in their domestic and foreign subsidiary operations, as well as their glass production plant joint venture. The graphs above show the debt structure of Constellation Brands’ financing. We incorporated these components into our financial model when forecasting their debt payments and debt issuances. The company’s total borrowings consist of notes payable to banks and long-term debt. In recent years, Constellation Brands increased their debt issuance due to increased acquisition activity. Constellation Brands’ debt rating recently fell to BBB- as the company continues to issue more debt to buy more companies. Historically, the debt ratio for the company has stayed between 60.0%-70.0% in the last ten years7. The debt to equity ratio stayed between 150% and 200%7. Both ratios were calculated using Constellation Brands’ book value for equity.

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Payout Policy

For the last five years, Constellation Brands returned value to shareholders with new dividend payments and aggressive share buy backs. The two largest shareholders in Constellation Brands are Robert Sands, the President & CEO, and Richard Sands, Chairman of the Board of Shareholders. Our research team sees that both of these individuals want to continue adding value to shareholders by increasing their dividend payout ratio to 21.2%7.

Constellation Brands has averaged a total payout ratio of 43.3% in the last ten years7. Our analysts found the total payout ratio by taking the sum of share repurchases and the dividend paid to shareholders and dividing this number by net income for each year. We accounted for this payout ratio in our future estimates by continuing to increase the dividend shareholders are expected to receive while also decreasing stock repurchases.

Catalysts for Investment

Expanding Major Brands

New growth opportunities lie in distributing Constellation Brands’ products into new markets within the United States. Historically, the Hispanic population in the United States provided the largest segment of revenue for Constellation Brands7. As part of their new corporate strategy, Constellation Brands’ management is focusing on expanding their focus brands (Modelo, Corona, and Pacifico) into larger parts of the U.S. population outside of the Hispanic population. Originally, marketing to the Hispanic population gave Constellation Brands a home field advantage when advertising their product in local television and radio advertisements in the southwestern states. As these Hispanic focus brands have continued to gain traction, management has looked to new ways to expand the distribution of their products into other areas of the United States outside of the southwest. In our valuation model, one of our drivers of growth was calculated by assuming that Constellation Brands will be able to meet a 3.1% organic growth rate as they continue to increase their market exposure to other populations in the United States. The company will continue to gain market share with the general population of the United States as management plans national television ads in both Spanish and English. Constellation’s management identified sporting events as one of the best ways for the company to gain recognition. For example, in this most recent year, Modelo is simultaneously being held as the

official import beer of the Kentucky Derby, the Los Angeles Rams and the UFC20. Marketing moves like these demonstrate Constellation’s commitment to building brand value by gaining sponsorship at large events that give them exposure to broader audiences like NFL

Source: Grocery Headquarters23 Higher Priced Products

Constellation Brands’ new initiatives to focus on premium wine and spirits products will raise their bottom line and increase their competitive advantage in the alcoholic beverage industry. In recent earning calls, Constellation Brands’ management has discussed developing more premium products in their three operating segments. In the wine and spirits segment, Constellation Brands is working on acquiring wines that sell from $225 to $250 and developing their own red rosé that could sell for as much as $10020. Launching new premium products with higher prices would increase the average selling price for products that are sold in Constellation’s wine and spirits segment, which would dramatically increase revenue. As of their most recent 10-K filing, Constellation Brands saw the largest increases in net sales in their wine & spirit segment due to the Meomi and Prisoner wine brands7. Both wine products sell at prices between $5 and $257. Bringing new premium wine products to their portfolio would supplement the strong growth these brands have seen by meeting consumer demand for high end products.

Strengths

Constellation Brands’ greatest strength is its exclusive importation agreements with the suppliers of imported Mexican beer products. This inhibits competitors from forming and threatening their claim on the market share of Mexican beers. In the U.S., Constellation Brands owns six of the 15 top-selling imported beer brands. Constellation Brands’ distribution and manufacturing

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networks are another one of their greatest strengths. Both of these networks help Constellation Brands achieve higher margins while also growing their brands in popular consumer markets. The key component to their low operating costs is the in-house glass bottling facility Constellation Brands controls in Mexico. We believe this facility gives Constellation Brands a key advantage when competing against other brewers in the United States. In addition to the strengths of their beer segment, Constellation Brands’ wine & spirit segment has the economies of scale to grow organic sales and enhance producing capabilities.

Weaknesses

Dependency on imported Mexican beer business growth is also Constellation Brands’ greatest weakness. Without the growth of this key revenue segment, Constellation Brands will not be able to capture a larger market share or drastically increase its revenue. Without Mexican beers, the company can only capture growth from craft beers, which is growing at a slower rate than anticipated7. Even more troubling, the company recently recorded a goodwill impairment loss on the fair market value of Ballast Point20. Expenses like this impairment loss may signal that Constellation Brands has been paying too much for their acquisitions. Another weakness is the currency risk associated with operating in Mexico. If the Mexican peso appreciates in value even marginally compared to the U.S. dollar, then operating expenses will increase substantially. This could either decrease production or increase price per unit for Constellation Brands’ products. In either case revenue will decrease lowering the share price. Most of the beers in Constellation Brands’ beer portfolio are made in Baja California and the region has been known to suffer from water shortages from time to time. The company also has limited exposure to the spirits industry in comparison to its beer and wine brands.

Opportunities

Constellation Brands has also shown interest in recreational marijuana sales in Canada. Currently, Constellation Brands is working with Canopy Growth Corporation, a Canadian company. Recreational marijuana is set to become legal in Canada this year. Edible marijuana products are set to become legal in 2019 as well. Constellation Brands is set to capitalize on this by producing non-alcoholic marijuana drinks. Cowen analyst Vivien Azer notes that the decision would not negatively

affect Constellation’s beer brands or wine and spirits saying that those products appeal more towards Hispanic communities which are less likely to consume marijuana than white and black communities26

Threats

A material shift in consumer preferences could also cause the sales of beer brands to decrease. Additionally, Constellation Brands’ new breweries in Baja California has caused a response by the local farmers. The protests are addressing the increased usage of water for beer and the draining of the local aquifer. If the state government of Baja California reverses its authorization for the usage of water, this would threaten Constellation Brands’ ability to finish production of the breweries24. Constellation Brands is also dependent on the North American Free Trade Agreement (NAFTA). If NAFTA is repealed or some of the trade agreements are repealed, then Constellation Brands could face higher input supply prices or lower imports to the U.S. In either case, the company will lose value.

Investment Positives

• Exposure to three segments of revenue in the alcoholic beverage industry

• Dominant market share in new growth beverages. Constellation accounted for 80.0% of the total U.S. beer category growth22

• Unmatched competitive positioning in the imported beer business. Constellation Brands is the leading imported beer company in the U.S. and has six of the 15 top-selling imported beer brands22

• The economies of scale created by their wine subsidiaries provide an economic moat that will make it harder for other beverage companies to erode their market share

Investment Negatives

• Lack of international presence. Constellation Brands is not exposed to international markets. As of 2017, 97.0% of its revenues come from the United States7

• The popularity of Mexican beer products may decrease and reduce Constellation’s bottom line

• With more consumers becoming passionate about companies making ethical corporate decisions, a scale for environmental, social, and

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governance (ESG) awareness was made to evaluate companies. Constellation Brands, Inc. (STZ) received a composite score of 54 out of 100 which scored in the 38th percentile to comparable peer companies25. This negatively affects the company as consumers are less willing to support the company and purchase its products. This denotes that Constellation Brands, Inc. is lagging competitors in terms of sustainability initiatives which could negatively impact future financial performance in such competitive industry.

Methods of Valuation

We arrived at our target stock price range by considering the different financial, economic, and strategic factors that drive the equity value of Constellation Brands. We also considered any trends in the alcoholic beverage industry that would change the future growth rates, projected cash flows, and capital expenditures of Constellation Brands. We used three different valuation models to gain a better understanding of Constellation Brands’ intrinsic value. In our analysis, we used a Discounted Cash Flow model (DCF), an Economic Profit model (EP), and relative valuation metrics with selected comparable companies in the company’s industry. We believe the Discounted Cash Flow Model and Economic Profit model are the most accurate representations of Constellation Brands’ intrinsic value because our research team created specific assumptions to capture the different variables that affect Constellation Brands’ share price. Our research analysts made specific assumptions to demonstrate how we believe the stock will perform in relation to the company’s growth strategies, financing decisions, and continued business operations. We projected out Constellation Brands’ cash flows over a five-year horizon to demonstrate its attractive valuation in the alcoholic beverage industry.

Revenue Decomposition & Growth

Revenue growth is projected to increase 7.6% in the first three years of our forecast period before falling 0.5% each year for the remaining three years in our model. We arrived at this projected number by decomposing Constellation Brands’ revenues into their beer and wine & spirits segments. After separating revenues into each product segment, our analysts then calculated the net

sales attributed to each segment by taking the cases sold per product and multiplying it by the price per case. We followed this methodology for both segments and incorporated our assumptions into the growth rates for the number of cases sold in beer, wine and spirits, and for the price per case of each beer, wine and spirits product.14

Beer Segment Growth

Beer segment unit sales are projected to increase 7.3% each year in the next three years before falling off 0.5% each year after. One beer unit sold is defined as a case of twenty-four 12 fluid ounce units. We arrived at this unit sales number by taking the sum of the following growth rates:

Hispanic population growth rate: 2.0%

Annual Imported Beer Market Share Growth Rate for Constellation Brands: 3.1%

Long-term real GDP growth: 2.2%

Total Beer unit sales growth: 7.3%

We chose the Hispanic population as one of the drivers of unit sales growth because they have traditionally been one of the largest and most demanding target markets for Constellation Brands. We calculated the annual import beer market share growth rate by multiplying Constellation Brands’ 48.0% market share in the import industry by the 6.4% growth import beers have seen in the United States. We used our estimated 2.2% growth expectation in long-run GDP because Constellation Brands is a consumer product company that benefits off increases in real GDP that can directly be linked to increases in consumer spending.

Beer case price is estimated to increase 2.0% each year. We arrived at this assumption by taking the most recent change in the consumer price index of 2.0% and growing our price to reflect the overall inflationary trends that affect consumer products.

Wine & Spirits Segment Growth

Wine and spirits segment unit sales are projected to increase 3.0% each year in the next three years before falling off 0.5% each year after. One wine & spirit unit is defined as a 9-liter case. We arrived at this unit sales number examining Constellation Brands’ most recent organic sales number for their wine segment and assuming they will continue to achieve this conservative growth.

Valuation

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Wine and spirits case price is estimated to increase 2.0% each year. We arrived at this assumption by taking the most recent change in the consumer price index of 2.0% and growing our price to reflect the overall inflationary trends that affect consumer products.

Continuing Value (CV) Growth

CV growth was projected based on the long-term estimate we used for real GDP growth in our economic analysis section. We projected our company’s free cash flow at this 2.2% real GDP growth rate to reflect a conservative estimate at what we thought Constellation Brands’ cash flows would truly grow at far into the future.

Cost of Goods Sold (COGS) as Percent of Sales

COGS as a percentage of sales is forecasted to decrease 1.0% from 2017 levels in 2018 and then decrease 1.0% again in 2019. We built these decreases into our model’s assumptions by taking the 44.2% of sales level in 2017 and decreasing this level by 1.0% in 2018 and 2019. From 2019 onward, we kept the COGS percentage constant at 43.3%. Our team forecasted these decreases into COGS because we believe Constellation Brands will be able to decrease its manufacturing, production, and distribution costs by upgrading its production facilities with new enterprise resource planning software and glass & material sourcing benefits that decreases these expenses. The in-house glass sourcing facility Constellation Brands owns in Mexico continues to help the company increase its operating margins in its beer segment. The enterprise resource planning software will help Constellation Brands decrease its operational expenses in its beer manufacturing facilities.

Selling, General, & Administrative Expense (SGA)

SG&A expense is projected to increase 3.0% in the first two years as a percentage of sales and level off after in the projection period. In 2018, SG&A reaches 17.2% of sales and in 2019, SG&A expense reaches 17.7% of sales before leveling off at the 17.7% through the rest of our projection period. Our team increased SG&A expenses by 3.0% in each of the next two years because we believe that Constellation Brands will continue to spend more on marketing and selling expenses related to pushing their Mexican beers into media markets in the United States. Many of the costs associated with building this brand awareness should be reflected in SG&A expense and we

wanted to grow SG&A as an increasing percentage of sales to accurately reflect these efforts.

Margins

We decided to slightly grow the operating and gross profit margins over the course of our projections to accurately reflect Constellation Brands’ ability to produce multiple types of products in one location. We felt that this was one of the strongest reasons for why Constellation Brands would continue to outcompete competitors in the alcoholic beverage industry.

Capital Expenditures

Capital expenditures are forecasted to initially increase in the next two years and taper off in the years after. Capital expenditures per year for their beer business is $200 million, there wine business is another $200 million, and they have committed capital towards capital expenditures of $1.1 billion dollars to be paid by 2023 for the expansion of their Mexican beer production facilities. We captured this planned capital expenditures in our model by putting capital expenditures at $1.3 billion in 2018. In addition, management recently announced that they are spending additional capital expenditures of around $23 million to upgrade their beer processing plants in California20.Both capital expenditures are related to an enterprise resource planning initiative that they believe will lower the operational costs for these beer breweries. Taking these quotes and estimates in mind, we decided to calculate capital expenditures at a minimum of $600 million each year into our future projections to capture the minimum $400 million required of each business segment and then allow an additional $200 million in capital expenditures to capture any possible projects the company may start during the year.

Stock Repurchases

As mentioned earlier in the payout policy section of this report, the management of Constellation Brands has issued share buyback programs and increased dividend payout policies to attract investors. We analyzed past stock repurchase programs and discovered that on average, Constellation Brands buys back stock to increase their treasury stock by 5.0% each year. We recognize that this may be one of the weaker areas of our model because forecasting for stock repurchase depends on a variety of factors that are hard to predict, but we thought accounting for this use of cash was necessary when modeling

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Constellation Brands. We felt further encouraged to add these stocks repurchase options after reading that management only plans to continue buying back stock and increasing total payout to shareholders. For these reasons, we grew the treasury stock account by 5.0% each year to reflect these assumptions.

Issuance of Debt

After examining Constellation Brands’ debt financing, our team of analysts noted that they historically used their revolving credit facility to fund their cash balance when it dipped below amounts that would violate their interest coverage covenants and leverage ratio requirements. After searching through their financial statements and debt structure, we were not able to find coverage covenants or leverage ratio requirements with specific numbers. With this context in mind, we grew their debt balance so that their book value debt to equity ratio remained above 100% for the remainder of our forecast period. We thought this was the best way to account for the leverage increases that Constellation Brands may use as they continue to finance new capital expenditure projects and pursue possible acquisitions. We understand that our debt issuance forecasts may not accurately reflect the financing plans of Constellation Brands but wanted to use an estimate in our model to simulate its operations going forward.

Weighted Average Cost of Capital (WACC)

We used the Weighted Average Cost of Capital (WACC) to discount unlevered free cash flows in the Discounted Cash Flow and Economic Profit models.

Cost of Debt

Pre-Tax Cost of Debt: 3.1%

Marginal Tax Rate: 15.3%

Constellation Brands’ debt rating is BBB-, which implies that its publically traded debt is below investment grade. For our risk free rate we used the 30 year treasury yield on US government bonds which is at 3.07%. To find our company’s specific pre-tax cost of debt, we took the marginal spread between the US 10-year treasury yield and Constellation Brands’ most debt recent issuance yield to arrive of a debt premium of 0.5%. We then applied this

0.5% premium to the pre-tax cost of debt by adding it to our 3.07% risk free rate. The sum of these numbers gave us a pre-tax cost of debt of 3.12%. After calculating the pre-tax cost of debt, we multiplied this number by one minus the marginal tax rate of 15.3% and arrived at an after-tax cost of debt rate of 2.65%.

Cost of Equity

Raw Beta: 0.71

Risk-Free Rate: 3.07%

To determine the cost of equity, we used the capital asset pricing model. We found the raw beta of Constellation Brands from Bloomberg and the current 30-year risk-free rate as well. Our equity risk premium was calculated by the esteemed New York University professor Aswath Damodaran at 4.2%26. Using the capital asset pricing model equation, we calculated a cost of equity at 6.05%.

After multiplying our weight of equity (83.0%) by our cost of equity (6.05%) and our weight of debt (17.0%) by our after-tax cost of debt (2.65%), we arrived at our WACC of 5.46%.

Valuation Models

Our DCF model and EP model result in an adjusted target price of $251.70 based on the assumptions we made above. When calculating our share price, we projected our free cash flow into a five-year near-term period and a longer continuing value period to reflect the company’s cash flows into perpetuity. These cash flows were then discounted with the WACC and represent the intrinsic value we believe our stock stands at today. We originally arrived at a share price of $241.60 but then adjusted this share price to reflect the partial year adjusted share price by multiplying it by (1+Cost of Equity– Dividend Yield)^ (Fraction of our year-end). Our analysts believe that the DCF model gives the most accurate representation of the intrinsic value of the company’s stock because we were able to implement our assumptions of decreasing COGS, increasing SG&A, and varied capital expenditures. Our DDM model gives us a target price of $201.25. We do not believe the DDM model is an accurate representation of the intrinsic value of the stock because the company just

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started paying dividends in 2016 and is not known for its dividend payout policy.

For our relative valuation, we used the fundamental P/E ratio to arrive at an implied share price of $223.85. We also used the PEG ratio to calculate an implied share price of $270.21. When determining our comparable companies, we selected corporations in Constellation Brands’ beverage industry that are publicly traded and directly compete with them over unit product sales. After initial research, we decided to narrow our comparable company analysis to Anheuser-Busch, Molson Coors, Boston Beer Company, PepsiCo Inc., Brown Forman Corp, Diageo PLC, and the Monster Beverage Company. We specifically chose companies in the alcohol beverage industry as well as companies not involved in the alcoholic beverage industry to measure how Constellation Brands’ stock would be affected by these average P/E ratios and PEG ratios. When calculating our average PEG ratios for 2018 and 2019, we removed the PEG numbers supplied by PepsiCo, Inc. and Brown Forman Corp because they were outliers in the data set.

Sensitivity Analysis

We used our sensitivity analysis to test different combinations of COGS, SG&A expense, beer case growth, wine case growth, and capital expenditures.

COGS Change against the WACC

Analyzing changes in COGS against changes in the WACC showed our team how Constellation Brands’ stock responds to changes in cost of goods sold and changes in the weighted average cost of capital. The cost of goods sold changes are independent of the capital structure of the company. Cost of goods sold captures the prices of inputs, the power of suppliers, and the labor associated with the product. The weighted average cost of capital gives a figure of the capital structure of the company. If Constellation Brands changes their capital structure by increasing debt, issuing or buying equity, or external changes occur such as the lowering of the risk-free rate, then we would see a change in the WACC. So, using these two independent variables, we would be able to see how Constellation Brands’ share price could change based on operational differences and changes in the capital structure of their company.

CV growth of NOPLAT against ROIC

Measuring CV growth versus ROIC gave our team a better understanding of how Constellation Brands’ stock price reacted to changes in long term growth and returns on invested capital. ROIC specifically demonstrates a company’s ability to earn cash flows based on the capital it invests. With this definition in mind, our analyst team wanted to examine how Constellation Brands’ share price fluctuated with changes in this measure of operational efficiency. Furthermore, we wanted to evaluate the effect the changes in the CV growth rate would cause in estimated share price. We kept the current ROIC of our CV in the middle of our sensitivity table (18.0%) and forecasted 0.5% increases and decreases in ROIC and .1% increases and decreases in CV growth rate to test their effects on share price. We varied the ROIC to test how Constellation Brands’ stock price would change if management failed to continue delivering high returns based on invested capital.

CV growth of NOPLAT against the risk-free rate

Plotting the CV growth of NOPLAT against the risk-free rate reflects the possibility of Constellation Brands’ stock price being affected by the raising interest rate environment. In recent news, the Federal Reserve has commented that it plans to raise interest rates to respond to the growing inflationary environment in the United States. We compared our long-term growth rate against increases of the risk-free rate in increments of 25 basis points to capture how Constellation’s stock would react to the increasing cost of borrowing.

Beer case growth against the WACC

We tested the sensitivity of the beer case growth rate against the WACC to see how our stock price changes in response to fluctuations in beer cases sold. We wanted to test these variations because Constellation Brands makes most of its revenue from its beer segment. We tested our most realistic estimate as the base of our beer case growth of 7.5% and tested 0.5% increases and decreases across the range of growth estimates. The decreases and increases in beer case growth were tested to demonstrate the different effect changing consumer demand for Mexican beer products would have on Constellation’s stock price. The WACC was used as the other part of the sensitivity analysis to represent Constellation Brands’ firm wide cost of capital. Testing WACC against the growth of beer case growth demonstrates how the intrinsic value of the stock changes depending on both important factors.

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Wine & Spirits case growth against the WACC

We tested the sensitivity of the wine & spirit case growth rate against the WACC to see how our stock price changes in response to fluctuations in wine & spirits cases sold. We wanted to test these variations because after the beer segment, Constellation Brands makes the rest of its revenue from its wine & spirit segment. We tested our most realistic estimate as the base of our wine & spirit case growth of 3.0% and tested 0.5% increases and decreases across the growth estimates. The decreases and increases in wine & spirits case growth were tested to demonstrate the different effect changing consumer demand for premium products would have on Constellation’s stock price. The WACC was used as the other part of the sensitivity analysis to represent Constellation Brands’ firm wide cost of capital. Testing WACC against the growth of wine & spirits case growth demonstrates how the intrinsic value of the stock changes depending on both important factors.

CV growth against steady state capex

Testing the steady state capex number gave our analysts a better understanding of how much Constellation Brands’ valuation changes based on increases in PPE. We changed the value of the steady state capex in increments of $50 million to observe how small changes in this spending number effect valuation. Many of the projects Constellation Brands plans to consider may result in changes in capex that will be larger than the bare minimum required.

SG&A change against the WACC

We tested increases in SG&A expense against the WACC because Constellation Brands is planning on expanding the distribution of its brands into other markets in the United States. We believe that to expand into these markets Constellation Brands will spend more money on marketing and selling expenses to increase their brand exposure. Comparing increases in expenses to changes in the WACC showed our analysts how Constellation’s stock price changes in relation to a higher WACC and higher SG&A.

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2. Lebsdorf, B. (2018, March 28). Wall Street Journal. Retrieved from Wall Street Journal: https://www.wsj.com/articles/u-s-gdp-growth-revised-up-to-2-9-rate-in-fourth-quarter-1522240312

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4. US Bureau of Labor Statistics. Consumer Price Index Change. Accessed April 17th, 2017. https://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief

5. Trading Economics, Purchasing Manfucaturers Index

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7. Constellation Brands 2017 10-K SEC Filing 8. Kell, John; Fortune; “Why Mexican Beers

Continue to Outperform the Industry”. 9. Krogstad, Jens; Pew Research Center; “U.S.

Hispanic population growth has leveled off”. 10. Fry, Richard; Pew Research Center; “Millennials

projected to overtake Baby Boomers as America’s largest generation”.

11. CFRA S&P Global Beverage Industry Survey 12. Euro monitor International Passport Data (Beer) 13. Molson Coors 10-K 2017 Part 1

14. Anheuser Busch Annual Report 2017 p.g.48 15. IBIS World US Industry Reports – Wineries –

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and Production Data” 17. Thompson One; “Comparisons within the

Alcoholic Beverage Industry” 18. Trinchero Family Estates; “Our Family of Brands” 19. U.S. Department of Commerce – Bureau of the

Census 20. Constellation Brands Fourth Quarter Earnings Call 21. Seeking Alpha – Past Earnings for Constellation

Brands 22. Yahoo Finance – Analyst Future Expectations for

Constellation Brands 23. Grocery Headquarters. (n.d.). Market share of the

leading imported beer brands in the United States in 2017. In Statista - The Statistics Portal. Retrieved April 16, 2018, from https://www.statista.com/statistics/586521/market-share-imported-beer-brands-in-the-united-states/.

24. Agren, David; The Guardian; “Mexico protesters fear US-owned brewery will drain their land dry”

25. Fisher Investments – Consumer Staples f 26. Aswath Damodaran Equity risk Premium

http://pages.stern.nyu.edu/~adamodar/ 27. Bloomberg Terminal Search Commodity Prices for

Wheat, Aluminum, Corn

References

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This report was created by students enrolled in the Security Analysis (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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Constellation Brands Inc. Revenue DecompositionReported in MillionsFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EBeer Cases Sold (24 Pack) 201 218 246 264 284 304 325 346 366

Year-Over-Year Growth 10.4% 8.2% 13.0% 7.3% 7.3% 7.3% 6.8% 6.3% 5.8% Total Sales $ 3,189 $ 3,623 $ 4,229 $ 4,629 $ 5,066 $ 5,545 $ 6,040 $ 6,549 $ 7,067 Year-Over-Year Growth 12.4% 13.6% 16.7% 9.4% 9.4% 9.4% 8.9% 8.4% 7.9% Percentage of Net Sales 52.9% 55.3% 57.7% 58.7% 59.7% 60.7% 61.6% 62.6% 63.6% Price per Case $ 15.8 $ 16.6 $ 17.2 $ 17.5 $ 17.9 $ 18.2 $ 18.6 $ 19.0 $ 19.3 Price Growth 1.8% 5.0% 3.3% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%Wine & Spirits Cases Sold (9 Liters) 66 68 69 71 73 76 78 79 80 Year-Over-Year Growth -1.2% 3.3% 1.5% 3.0% 3.0% 3.0% 2.5% 2.0% 1.5% Total Sales $ 2,839 $ 2,926 $ 3,102 $ 3,259 $ 3,424 $ 3,597 $ 3,761 $ 3,913 $ 4,051 Year-Over-Year Growth -0.2% 3.0% 6.0% 5.1% 5.1% 5.1% 4.5% 4.0% 3.5% Price per Case 43.0 42.9 44.8 45.7 46.6 47.6 48.5 49.5 50.5 Price Growth 0.0% -0.6% 4.2% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Percentage of Net Sales 47.1% 44.7% 42.3% 41.3% 40.3% 39.3% 38.4% 37.4% 36.4%Consolidated Net Sales $ 6,028 $ 6,548 $ 7,332 $ 7,888 $ 8,490 $ 9,142 $ 9,801 $ 10,462 $ 11,118

Year-Over-Year Growth 6.1% 8.6% 12.0% 7.6% 7.6% 7.7% 7.2% 6.7% 6.3%

Constellation Brands Inc. Income StatementAll figures reported in Millions, except share dataFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ESales 6,672$ 7,224$ 8,062$ 7,888$ 8,490$ 9,142$ 9,801$ 10,462$ 11,118$ Less - excise tax (644) (675) (730) (714) (769) (828) (888) (947) (1,007) Net sales 6,028 6,548 7,332 7,174 7,721 8,314 8,913 9,514 10,112 Cost of product sold (3,449) (3,606) (3,802) (3,453) (3,679) (3,962) (4,247) (4,534) (4,818) Gross profit 2,579 2,942 3,529 3,721 4,042 4,352 4,666 4,981 5,293 Depreciation (162) (180) (238) (280) (353) (399) (413) (427) (439) Amortization of non-goodwill intangibles (40) (41) (10) (6) (6) (6) (5) (5) (23) Selling, general & administrative expenses (1,078) (1,177) (1,346) (1,357) (1,504) (1,620) (1,737) (1,854) (1,970) Gain on sale of business - - 262 - - - - - - Impairment of goodwill & intangible assets - - (46) - - - - - - Gain on remeasurement to fair value of equity method investme - - - - - - - - - Restructuring charges - - - - - - - - - Acquisition-related integration costs - - - - - - - - - Operating income (loss) 1,298 1,544 2,152 2,078 2,179 2,328 2,511 2,695 2,861 Earnings from unconsolidated investments 22 51 27 26 24 23 22 21 19 Interest expense (338) (314) (333) (289) (316) (322) (320) (311) (310) Loss on write-off of financing costs (4) (1) - - - - - - - Income (loss) before income taxes 978 1,280 1,846 1,815 1,887 2,029 2,212 2,405 2,570 Provision for Income Taxes (343) (441) (554) (278) (289) (310) (338) (368) (393) Net income (loss) 634 840 1,291 1,537 1,598 1,718 1,874 2,037 2,177 Net loss attributable to noncontrolling interests 3 (6) (4) - - - - - - Net income attributable to CBI 637$ 834$ 1,287$ 1,537$ 1,598$ 1,718$ 1,874$ 2,037$ 2,177$

Net income per common share attributable to CBI: Basic - Class A Common Stock 4.40$ 5.42$ 7.79$ 7.71$ 8.02$ 8.62$ 9.40$ 10.22$ 10.92$ Basic - Class B Convertible Common Stock 4.00$ 4.92$ 7.07$ 6.94$ 7.22$ 7.76$ 8.46$ 9.20$ 9.83$

Weighted avergae common shares outstanding: Basic - Class A Common Stock 169.33 173.38 175.93 175.93 175.93 175.93 175.93 175.93 175.93 Basic - Class B Convertible Common Stock 23.40 23.36 23.35 23.35 23.35 23.35 23.35 23.35 23.35

Cash dividends declared per common share: Class A Common Stock -$ 1.24$ 1.60$ 1.68$ 1.74$ 1.87$ 2.04$ 2.22$ 2.37$ Class B Convertible Common Stock -$ 1.12$ 1.44$ 1.51$ 1.57$ 1.69$ 1.84$ 2.00$ 2.13$

Constellation Brands Inc. Balance SheetReported in MillionsFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EAssetsCurrent Assets: Cash & cash equivalents 110$ 83$ 177$ 98$ 102$ 232$ 287$ 593$ 111$ Accounts receivable, net 599 733 737 721 776 836 896 956 1,016 Inventories 1,827 1,852 1,955 1,913 2,059 2,217 2,377 2,537 2,696 Prepaid expense & other current assets 375 310 361 353 380 409 438 468 497 Total current assets 2,911 2,978 3,230 3,085 3,316 3,694 3,998 4,555 4,321 Property, plant & equipment, at cost 3,732 4,513 5,210 6,510 7,510 8,110 8,710 9,310 9,910 Less accumulated depreciation (1,050) (1,179) (1,277) (1,557) (1,910) (2,309) (2,722) (3,149) (3,588) Property, plant & equipment, net 2,682 3,333 3,933 4,953 5,600 5,801 5,987 6,161 6,322 Goodwill 6,208 7,139 7,921 7,921 7,921 7,921 7,921 7,921 7,921 Intangible assets 3,181 3,404 3,378 3,867 3,938 4,213 4,493 4,902 5,130 Less: accumulated amortization - other assets - - - (6) (11) (17) (22) (27) (50) Net Intangible Assets 3,181 3,404 3,378 3,862 3,926 4,196 4,471 4,875 5,080 Other assets, gross 163 112 141 182 196 211 226 241 256 Less: accumulated amortization - other assets - - - - - - - - - Other assets, net 163 112 141 182 196 211 226 241 256 Total assets 15,145$ 16,965$ 18,602$ 20,001$ 20,959$ 21,822$ 22,603$ 23,752$ 23,899$

Liabilties and Stockholders' EquityCurrent liabilities: Notes payable to banks 52$ 408$ 607$ 607$ 593$ 639$ 688$ 737$ 787$ Current maturities of long-term debt 158 857 911 208 600 2,154 1,578 3,234 - Accounts payable 286 429 560 447 481 518 555 592 629 Accrued excise taxes 29 34 45 39 42 45 48 51 54 Other accrued expenses & liabilities 606 544 576 563 606 653 700 747 794 Total current liabilities 1,131 2,272 2,698 1,863 2,322 4,008 3,568 5,362 2,265 Long-term debt, less current maturities 7,138 6,816 7,721 9,313 9,113 7,460 7,682 5,949 7,949 Deferred income taxes 819 1,022 1,134 1,241 1,359 1,488 1,629 1,784 1,953 Other liabilities 176 163 166 195 210 226 242 259 275 Total liabilities 9,263 10,273 11,718 12,612 13,004 13,181 13,122 13,353 12,442 CBI stockholders' equity: Class A common stock 3 3 3 3 4 5 6 4 3 Class B convertible common stock 0 0 0 0 0 0 0 0 0

Common Stock 2,270 2,589 2,756 2,840 2,925 3,010 3,094 3,094 3,094 Retained earnings 5,278 6,091 7,310 8,037 8,825 9,733 10,797 12,024 13,391 Accumulated other comprehensive income (loss) (131) (453) (400) (400) (400) (400) (400) (400) (400) Total stockholders' equity before the undernoted 7,419 8,230 9,669 10,481 11,355 12,348 13,497 14,723 16,089

Less: Treasury stock - Class A common stock (1,646) (1,668) (2,776) (3,083) (3,391) (3,699) (4,007) (4,315) (4,623) Class B convertible common stock (2) (2) (2) (2) (2) (2) (2) (2) (2) Noncontrolling interests 111 132 (6) (6) (6) (6) (6) (6) (6) Total stockholders' equity 5,881 6,692 6,885 7,389 7,955 8,640 9,481 10,399 11,457 Total liabilities and stockholders' equity 15,145$ 16,965$ 18,602$ 20,001$ 20,959$ 21,822$ 22,603$ 23,752$ 23,899$

Constellation Brands Inc. Cash Flow StatementReported in MillionsFiscal Year Ending 2/28/2017 2018E 2019E 2020E 2021E 2022E 2023ECash flows from operating activities: Net income (loss) 1,537$ 1,598$ 1,718$ 1,874$ 2,037$ 2,177$

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 280 353 399 413 427 439 Amortization of non-goodwill intangible assets 6 6 6 5 5 23

Changes in operating assets and liabilities, net of effects from purchases of businesses:Accounts receivable 16 (55) (60) (60) (60) (60) Inventories 42 (146) (158) (160) (160) (159) Prepaid expenses & other current assets 8 (27) (29) (29) (30) (29) Accounts payable (113) 34 37 37 37 37 Accrued excise taxes (6) 3 3 3 3 3 Other accrued expenses & liabilities (12) 43 47 47 47 47 Deferred Income Taxes 108 118 129 141 155 169

Net cash flows from operating activities 1,865 1,927 2,092 2,272 2,461 2,647

Cash flows from investing activities:Purchase of Intangible Assets (490) (70) (275) (281) (408) (228) Purchases of property, plant & equipment (1,300) (1,000) (600) (600) (600) (600) Purchase of Other Assets (40) (14) (15) (15) (15) (15)

Net cash flows from investing activities (1,830) (1,084) (890) (896) (1,023) (843)

Cash flows from financing activities: Purchases of treasury stock (308) (308) (308) (308) (308) (308)

Change in short-term debt (703) 379 1,600 (527) 1,706 (3,184) Dividends paid (810) (810) (810) (810) (810) (810)

Change in Long-term debt 1,592 (200) (1,654) 223 (1,734) 2,000 Issuance of common stock 85 85 85 85 (1) (1) Other Liabilities 29 15 16 16 16 16 Changes in Accumulated Other Comprehensive Income - - - - - -

Net cash flows from financing activities (114) (839) (1,071) (1,321) (1,131) (2,287)

Effect of exchange rate changes on cash & cash equivalentsNet increase (decrease) in cash & cash equivalents (80) 4 131 55 307 (483) Cash & cash equivalents, beginning of year 177 98 102 232 287 593 Cash & cash equivalents, end of year 98$ 102$ 232$ 287$ 593$ 111$

Constellation Brands Inc. Cash Flow StatementReported in MillionsFiscal Year Ending 2/28/2017 2015 2016 2017Cash flows from operating activities: Net income (loss) 836$ 1,061$ 1,539$

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 162 180 238 Deferred (tax) provision benefit 79 251 129 Amortization of intangible assets 40 41 10 Stock-based compensation 55 54 56 Amortization of deferred financing costs 12 12 13 Gain (loss) on sale of business - - (262) Equity in losses (earnings) of equity method investees, net of distributed earnings (1) - - Gain on remeasurement to fair value of equity method investment - - - Impairment of goodwill & intangible assets - - - Loss (gain) on disposal or impairment of long-lived assets, net - - - Loss (gain) on businesses sold or held for sale, net - - - Loss (gain) on obligation from put option of Ruffino shareholder - - - Loss on settlement of pension obligations - - -Changes in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable 16 (130) (49) Inventories (133) 10 (151) Prepaid expenses & other current assets (71) 46 (72) Accounts payable (1) 25 116 Accrued excise taxes 2 5 16 Other accrued expenses & liabilities 45 (117) 106 Other operating assets & liabilties, net 36 (25) (38) Net cash flows from operating activities 1,078 1,413 1,650

Cash flows from investing activities: Purchase of business, net of cash acquired (310) (1,316) (1,111) Purchases of property, plant & equipment (719) (891) (907) Proceeds from sale of business - - 575 Investment in equity method investee - - - Proceeds from sales of assets - - - Capital distributions from equity method investees - - - Payment of accrued earn-out amount - - - Proceeds from formation of joint venture - - - Proceeds from maturity of derivative instrument - - - Other investing activities 14 0 (19) Net cash flows from investing activities (1,016) (2,207) (1,462)

Cash flows from financing activities: Purchases of treasury stock - (34) (1,123) Principal payments of long-term debt (606) (209) (972) Dividends paid - (242) (315) Payment of minimum tax withholdings on stock-based payment awards (28) (39) (65) Payment of financing costs of long-term debt (14) (13) (14) Proceeds from issuance of long-term debt 905 610 1,966 Proceeds from exercise of employee stock options - - - Net proceeds from (repayment of) notes payable 13 361 197 Excess tax benefits from stock-based payment awards 78 203 131 Proceeds from shares issued under equity compensation plans 64 113 60 Proceeds from noncontrolling interests 115 25 - Payment of delayed purchase price arrangement (543) - - Proceeds from maturity of derivative instrument - - - Payment of preferred stock dividends - - - Net cash flows from financing activities (16) 776 (135)

Effect of exchange rate changes on cash & cash equivalents (3) (9) (5) Net increase (decrease) in cash & cash equivalents 43 (28) 48 Cash & cash equivalents, beginning of year 64 110 83 Cash & cash equivalents, end of year 110$ 83$ 177$

Constellation Brands Inc. Common Size Income StatementReported in % of SalesFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ESales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Excise Tax 9.7% 9.3% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%Cost of Sales 49.3% 47.4% 44.2% 43.8% 43.3% 43.3% 43.3% 43.3% 43.3%Depreciation 2.4% 2.5% 2.9% 3.6% 4.2% 4.4% 4.2% 4.1% 3.9%Amortization 0.6% 0.6% 0.1% -0.8% -0.7% -0.7% -0.6% -0.5% -2.3%Gross Profit 38.6% 40.7% 43.8% 47.2% 47.6% 47.6% 47.6% 47.6% 47.6%Selling, general & administrative expenses -16.2% -16.3% -16.7% -17.2% -17.7% -17.7% -17.7% -17.7% -17.7%Gain on sale of business 0.0% 0.0% 3.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Impairment of goodwill & intangible assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Gain on remeasurement to fair value of equity method investment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Restructuring charges 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Acquisition-related integration costs 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating income (loss) 19.5% 21.4% 26.7% 26.3% 25.7% 25.5% 25.6% 25.8% 25.7%Earnings from unconsolidated investments 0.3% 0.7% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2%Interest expense -5.1% -4.3% -4.1% -3.7% -3.7% -3.5% -3.3% -3.0% -2.8%Loss on write-off of financing costs -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Income (loss) before income taxes 14.7% 17.7% 22.9% 23.0% 22.2% 22.2% 22.6% 23.0% 23.1%Tax Provision -5.1% -6.1% -6.9% -3.5% -3.4% -3.4% -3.5% -3.5% -3.5% Net income (loss) 9.5% 11.6% 16.0% 19.5% 18.8% 18.8% 19.1% 19.5% 19.6%Net loss attributable to noncontrolling interests 0.0% -0.1% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net income attributable to CBI 9.6% 11.5% 16.0% 19.5% 18.8% 18.8% 19.1% 19.5% 19.6%

Constellation Brands Inc. Common Size Balance SheetReported in % of SalesFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EAssetsCurrent Assets: Cash & cash equivalents 1.7% 1.2% 2.2% 1.2% 1.2% 2.5% 2.9% 5.7% 1.0% Accounts receivable, net 9.0% 10.1% 9.1% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Inventories 27.4% 25.6% 24.3% 24.3% 24.3% 24.3% 24.3% 24.3% 24.3% Prepaid expense & other current assets 5.6% 4.3% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%Total current assets 43.6% 41.2% 40.1% 39.1% 39.1% 40.4% 40.8% 43.5% 38.9%Property, plant & equipment, at cost 55.9% 62.5% 64.6% 82.5% 88.5% 88.7% 88.9% 89.0% 89.1%Less accumulated depreciation -15.7% -16.3% -15.8% -19.7% -22.5% -25.3% -27.8% -30.1% -32.3%Property, plant & equipment, net 40.2% 46.1% 48.8% 62.8% 66.0% 63.5% 61.1% 58.9% 56.9%Goodwill 93.0% 98.8% 98.2% 100.4% 93.3% 86.6% 80.8% 75.7% 71.2%Intangible assets 47.7% 47.1% 41.9% 49.1% 46.4% 46.1% 45.9% 46.9% 46.3%Other assets, net 2.4% 1.5% 1.8% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% Total assets 227.0% 234.8% 230.8% 253.6% 246.9% 238.7% 230.6% 227.0% 214.9%

Liabilties and Stockholders' Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Current liabilities: 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Notes payable to banks 0.8% 5.7% 7.5% 7.7% 7.0% 7.0% 7.0% 7.0% 7.1% Current maturities of long-term debt 2.4% 11.9% 11.3% 2.6% 7.1% 23.6% 16.1% 30.9% 0.0% Accounts payable 4.3% 5.9% 6.9% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% Accrued excise taxes 0.4% 0.5% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Other accrued expenses & liabilities 9.1% 7.5% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%Total current liabilities 16.9% 31.5% 33.5% 23.6% 27.3% 43.8% 36.4% 51.2% 20.4%Long-term debt, less current maturities 107.0% 94.4% 95.8% 118.1% 107.3% 81.6% 78.4% 56.9% 71.5%Deferred income taxes 12.3% 14.2% 14.1% 13.6% 13.6% 13.6% 13.6% 13.6% 13.6%Other liabilities 2.6% 2.2% 2.1% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Total liabilities 138.8% 142.2% 145.4% 159.9% 153.2% 144.2% 133.9% 127.6% 111.9%CBI stockholders' equity: 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Class A common stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% Class B convertible common stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Additional paid-in capital 34.0% 35.8% 34.2% 36.0% 34.5% 32.9% 31.6% 29.6% 27.8% Retained earnings 79.1% 84.3% 90.7% 101.9% 103.9% 106.5% 110.2% 114.9% 120.4% Accumulated other comprehensive income (loss) -2.0% -6.3% -5.0% 3.6% -4.4% -4.4% -4.4% -4.4% -4.4%Total stockholders' equity before the undernoted 111.2% 113.9% 119.9% 132.9% 133.7% 135.1% 137.7% 140.7% 144.7%

Less: Treasury stock - Class A common stock -24.7% -23.1% -34.4% -39.1% -39.9% -40.5% -40.9% -41.2% -41.6%Class B convertible common stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Noncontrolling interests 1.7% 1.8% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% Total stockholders' equity 88.1% 92.6% 85.4% 93.7% 93.7% 94.5% 96.7% 99.4% 103.0% Total liabilities and stockholders' equity 227.0% 234.8% 230.8% 253.6% 246.9% 238.7% 230.6% 227.0% 214.9%

Constellation Brands Inc. Value Driver EstimationAll figures reported in millionsFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ENOPLAT $ 1,133 $ 1,455 $ 1,734 $ 1,879 $ 1,977 $ 2,116 $ 2,284 $ 2,455 $ 2,611 Sales 6,672 7,224 8,062 7,888 8,490 9,142 9,801 10,462 11,118 -Excise Tax 644 675 730 714 769 828 888 947 1,007 -Cost of Goods Sold 3,287 3,426 3,565 3,453 3,679 3,962 4,247 4,534 4,818 -SGA 1,078 1,177 1,346 1,357 1,504 1,620 1,737 1,854 1,970 -Depreciation 162 180 238 280 353 399 413 427 439 -Amortization of non-goodwill intangibles 40 41 10 6 6 6 5 5 23 +Implied Interest on Operating Leases 10 10 13 14 16 18 19 20 21 EBITA 1,470 1,735 2,186 2,092 2,195 2,345 2,530 2,716 2,882

Income Tax Provision 343 441 554 278 289 310 338 368 393 +Tax Shield on Interest Expense 52 48 51 44 48 49 49 48 47 +Tax Shield on imparment of goodwill & intangibles assets - - - - - - - - - -Tax on earnings from unconsolidated investments (3) (8) (4) (4) (4) (4) (3) (3) (3)

+Tax Shield on restructuring charges - - - - - - - - - +Tax Shield on acquisition-related integration costs - - - - - - - - - +Tax Shield on loss on write-off of financing costs 1 0 - - - - - - -

-Tax on gain on remeasurement to fair value of equity method investment - - - - - - - - - -Tax on gain on sale of business - - (40) - - - - - - +Tax Shield on Interest on Operating Leases 2 2 2 2 2 3 3 3 3 Less: Adjusted Taxes 394 483 563 320 336 359 387 415 441

Deffered Tax Liability 819 1,022 1,134 1,241 1,359 1,488 1,629 1,784 1,953 -Previous Year Defered Tax Liability 763 819 1,022 1,134 1,241 1,359 1,488 1,629 1,784 Plus: Deferred Taxes 56 203 111 108 118 129 141 155 169

Invested Capital (IC) 8,028 8,876 9,538 11,083 12,098 12,863 13,622 14,496 15,176 Normal Cash 15 16 18 18 19 21 22 23 25 Accounts Receivable 599 733 737 721 776 836 896 956 1,016 Inventories 1,827 1,852 1,955 1,913 2,059 2,217 2,377 2,537 2,696 Other Current Assets 375 310 361 353 380 409 438 468 497 Accounts payable 286 429 560 560 560 560 560 560 560 Accrued excise taxes 29 34 45 45 45 45 45 45 45 Other accrued expenses & liabilities 606 544 576 576 576 576 576 576 576 Operating Working Capital 1,895 1,903 1,891 1,824 2,054 2,302 2,553 2,805 3,055

Plus: Net PPE 2,682 3,333 3,933 4,953 5,600 5,801 5,987 6,161 6,322

Plus: PV of Operating Leases 283 286 361 452 521 563 604 646 688 Intangible Assets 3,181 3,404 3,378 3,867 3,938 4,213 4,493 4,902 5,130 Other Assets 163 112 141 182 196 211 226 241 256 Plus: Other Long-Term Operating Assets 3,344 3,515 3,519 4,049 4,134 4,423 4,719 5,143 5,386

Less: Other Long-Term Operating Liabilities 176 163 166 195 210 226 242 259 275

ROIC 16.5% 18.1% 19.5% 19.7% 17.8% 17.5% 17.8% 18.0% 18.0%Beg. Inv Capital 6,857 8,028 8,876 9,538 11,083 12,098 12,863 13,622 14,496 NOPLAT 1,133 1,455 1,734 1,879 1,977 2,116 2,284 2,455 2,611

EP $ 759 $ 1,017 $ 1,250 $ 1,359 $ 1,372 $ 1,455 $ 1,582 $ 1,711 $ 1,820 Beg. Inv Capital * 6,857 8,028 8,876 9,538 11,083 12,098 12,863 13,622 14,496 (ROIC - WACC) 11.1% 12.7% 14.1% 14.2% 12.4% 12.0% 12.3% 12.6% 12.6%

FCF (39)$ 608$ 1,072$ $ 335 $ 962 $ 1,351 $ 1,525 $ 1,581 $ 1,931 NOPLAT 1,133 1,455 1,734 1,879 1,977 2,116 2,284 2,455 2,611 Beg Inv Capital - End Inv Capital 1,171 847 662 1,545 1,015 765 759 874 680

Constellation Brands Inc. Weighted Average Cost of Capital (WACC) Estimation

Risk-Free Rate 3.1%Risk Premium 4.2%Beta 71.0%Cost of Equity 6.1%

Cost of DebtPre-Tax Cost of Debt 3.1%Marginal Tax Rate 15.3%After-Tax Cost of Debt 2.6%

Value of EquityShare Price 227.2Shares Outstanding 199Value of Equity 45,278

Value of DebtBV of Short-Term Debt 1,517BV of Long-Term Debt 7,721PV of Operating Leases 361Value of Debt 9,600

WeightsEquity 82.5%Debt 17.5%

WACC CalculationCost of Equity 6.1%Weight of Equity 82.5%After-Tax cost of Debt 2.6%Weight of Debt 17.5%WACC 5.5%

Constellation Brands Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation ModelsAssumptionsOrganic CV Growth Rate 2.20%ROIC 18.01%WACC 5.46%

Fiscal Year Ending 2/28/2017 2017 2018E 2019E 2020E 2021E 2022E 2023E

DCF ModelNear Term 0.064NOPLAT 1,879 1,977 2,116 2,284 2,455 2,611∆ Invested Capital 1,545 1,015 765 759 874 680Free Cash Flow 335 962 1,351 1,525 1,581 1,931Discount Periods 1 2 3 4 5 6Dicount Rate 1.1 1.1 1.2 1.2 1.3 1.4Discounted Free Cash Flows 317 865 1152 1233 1212 1404Present Value of Near Term Period 4,779.3

Continuing ValueNOPLAT 2,611Free Cash Flow 2,292Continuing Value in 2022 70,382Discount Periods 5Discount Rate 1.304PV of Continuing Value 53,964

Enterprise Value to Equity ValueValue of Operating Assets 58,743Plus: Excess Cash 159Less: Current Debt (1,517)Less: Long Term Debt (7,721)Less: Other Liabilities (166)Less: PV of Operating Leases (361)Less: ESOP's (974)Less: Minority Interest (6)Value of Equity 48,156.1Share Outstanding 199Intrinsic Stock Price at t= 0 241.64$ Partial Year Adjusted Intrinsic Stock Price $251.70

EP Model Near Term

Economic Profit 1,359 1,372 1,455 1,582 1,711 1,820Discount Periods 1 2 3 4 5 6Discount Rate 1.1 1.1 1.2 1.2 1.3 1.4Discounted Economic Profit 1,289 1,234 1,241 1,279 1,312 1,323Present Value of Near Term Period 6,355

Continuing ValuePerpetual Economic Profit 33,352Incremental EP 22,534Continuing Vale 55,886Discount Periods 5Discount Rate 1.3PV of Continuing Value 42,849

Enterprise Value to Equity ValuePV of Economic Profit 49,205Plus: Beg. IC from 2017 9,538Value of Operating Assets 58,743Plus: Excess Cash 159Less: Current Debt (1,517)Less: Long Term Debt (7,721)Less: Other Liabilities (166)Less: PV of Operating Leases (361)Less: ESOP's (974)Less: Minority Interest (6)Value of Equity 48,156Shares Outstanding 199Intrinsic Stock Price at t= 0 241.64$ Partial Year Adjusted Intrinsic Stock Price $251.70

Constellation Brands Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Key Assumptions CV growth 2.20% CV ROE 19.00% Cost of Equity 6.05%

Fiscal Year Ending 2/28/2017 2018E 2019E 2020E 2021E 2022E 2023EEPS 7.71$ 8.02$ 8.62$ 9.40$ 10.22$ 10.92$ Future Cash Flows P/E Multiple (CV Year) 22.95x EPS (CV Year) 10.92$ Future Stock Price 250.77$ Dividends Per Share 3.18$ 3.31$ 3.56$ 3.88$ 4.22$ Future Cash Flows 3.18$ 3.31$ 3.56$ 3.88$ 4.22$ 250.77$ Discount Periods 1 2 3 4 5 5 Discount Rate 1.061 1.125 1.193 1.265 1.342 1.342 Discounted Cash Flows 3.00$ 2.94$ 2.98$ 3.07$ 3.14$ 186.93$

Intrinsic Value 201.36$

Constellation Brands Inc. Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19BUD Anheuser-Busch InBev $107.47 $5.18 $5.91 20.75 18.18 23.0 0.90 0.79 TAP Molson Coors $74.23 $5.18 $5.53 14.33 13.42 10.1 1.42 1.33 SAM Boston Beer Company $189.05 $6.80 $7.44 27.80 25.41 5.4 5.15 4.71 PEP PepsiCo, Inc. $109.92 $5.71 $6.16 32.54 17.84 2.5 Outlier OutlierBF-B Brown Forman Corp $55.32 $1.48 $1.83 36.13 30.55 3.5 Outlier OutlierDEO Diageo PLC $141.09 $7.14 $7.06 19.67 16.57 2.9 6.74 5.67 MNST Monster Beverage Company $56.98 $1.78 $2.03 31.84 27.78 17.3 1.84 1.61

Average 26.15 21.39 3.21 2.82

STZ Constellation Brands Inc. $227.20 $8.56 $9.58 26.5 23.7 10.0 2.7 2.4

Implied Relative Value: P/E (EPS18) $ 223.85 P/E (EPS19) 204.95$ PEG (EPS18) 274.66$ PEG (EPS19) 270.21$

Ratio AnalysisFiscal Year Ending 2/28/2017 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E

Liquidity RatiosCurrent Ratio (Current Assets / Current Liabilities) 257.43% 131.04% 119.74% 165.61% 142.84% 92.17% 112.05% 84.95% 190.75%Quick Ratio ((Cash Equivalents + Accounts Receivable)/ Current Liabilities) 62.70% 35.89% 33.90% 43.97% 37.80% 26.65% 33.15% 28.91% 49.76%Cash Ratio (Cash & Cash Equivalents / Current Liabilities) 9.74% 3.66% 6.58% 5.26% 4.37% 5.79% 8.04% 11.07% 4.88%

Activity or Asset-Management RatiosTotal Asset Turnover (Sales / Total Assets) 44.06% 42.58% 43.34% 39.44% 40.51% 41.89% 43.36% 44.05% 46.52%Fixed Assets Turnover (Sales / Fixed Assets) 55% 52% 52% 46.63% 48.12% 50.43% 52.68% 54.50% 56.79%Inventory Turnover (Cost of Goods Sold / Average Inventory) 1.89 1.95 1.94 1.80 1.79 1.79 1.79 1.79 1.79

Financial Leverage RatiosDebt-to-Equity (Total Liabilities / Stockholders' Equity) 157.50% 153.52% 170.20% 170.68% 163.48% 152.56% 138.39% 128.40% 108.59%Equity Ratio (Total Equity / Total Assets) 38.83% 39.44% 37.01% 36.94% 37.95% 39.60% 41.95% 43.78% 47.94%Debt Ratio (Total Debt / Total Assets) 61.17% 60.56% 62.99% 63.06% 62.05% 60.40% 58.05% 56.22% 52.06%

Profitability RatiosGross Margin (Gross Profits / Sales) 42.78% 44.93% 48.14% 51.87% 52.35% 52.35% 52.35% 52.35% 52.35%Operating Margin (Operating income / Sales) 21.54% 23.58% 29.35% 28.96% 28.22% 28.00% 28.17% 28.33% 28.29%Pretax Margin (Pretax income / Sales) 16.22% 19.55% 25.17% 25.30% 24.44% 24.40% 24.82% 25.28% 25.42%Net Profit Margin (Net Income / Sales) 10.57% 12.73% 17.56% 21.43% 20.70% 20.67% 21.02% 21.41% 21.53%Return on Assets (Net Income / Average Total Assets) 4.21% 4.92% 6.92% 7.69% 7.63% 7.87% 8.29% 8.58% 9.11%Return on Equity (Net Income / Stockholders' Equity) 10.84% 12.46% 18.70% 20.80% 20.09% 19.89% 19.76% 19.59% 19.00%

Payout Policy RatiosFor Class A (Div Class A/ EPS A) 0.00% 22.88% 20.54% 21.71% 21.71% 21.71% 21.71% 21.71% 21.71%For Class B (Div Class B/ EPS B) 0.00% 22.76% 20.37% 21.71% 21.71% 21.71% 21.71% 21.71% 21.71%Total Payout ratio ((Div + Stock Repurchases)/ Net Income) 0.00% 25.97% 93.41% 72.73% 69.96% 65.07% 59.67% 54.89% 51.36%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating OperatingFiscal Year Ending 2018 Leases Fiscal Year Ending 2017 Leases Fiscal Year Ending 2016 Leases Fiscal Year Ending 2015 Leases2018 59.2 2017 59.2 2016 56.1 2016 48.42019 46.8 2018 46.8 2017 48.8 2017 42.72020 45.2 2019 45.2 2018 39.9 2018 36.72021 43.2 2020 43.2 2019 32.9 2019 33.42022 35.4 2021 35.4 2020 28.6 2020 29.2Thereafter 285.5 Thereafter 285.5 Thereafter 178.6 Thereafter 202.1Total Minimum Payments 515.3 Total Minimum Payments 515.3 Total Minimum Payments 384.9 Total Minimum Payments 392.5Less: Interest 91 Less: Interest 91 Less: Interest 57 Less: Interest 64PV of Minimum Payments 425 PV of Minimum Payments 425 PV of Minimum Payments 327 PV of Minimum Payments 329

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.12% Pre-Tax Cost of Debt 3.12% Pre-Tax Cost of Debt 3.12% Pre-Tax Cost of Debt 3.12%Number Years Implied by Year 6 Payment 8.1 Number Years Implied by Year 6 Payment 8.1 Number Years Implied by Year 6 Payment 6.2 Number Years Implied by Year 6 Payment 6.9

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 59.2 57.4 1 59.2 57.4 1 56.1 54.4 1 48.4 46.92 46.8 44.0 2 46.8 44.0 2 48.8 45.9 2 42.7 40.23 45.2 41.2 3 45.2 41.2 3 39.9 36.4 3 36.7 33.54 43.2 38.2 4 43.2 38.2 4 32.9 29.1 4 33.4 29.55 35.4 30.4 5 35.4 30.4 5 28.6 24.5 5 29.2 25.06 & beyond 35.4 213.5 6 & beyond 35.4 213.5 6 & beyond 28.6 137.2 6 & beyond 29.2 153.7PV of Minimum Payments 424.7 PV of Minimum Payments 424.7 PV of Minimum Payments 327.5 PV of Minimum Payments 328.8

Present Value of Operating Lease Obligations (2018)

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 8,973,565Average Time to Maturity (years): 4.70Expected Annual Number of Options Exercised: 1,909,269

Current Average Strike Price: 44.31$ Cost of Equity: 6.05%Current Stock Price: $227.20

2018E 2019E 2020E 2021E 2022E 2023EIncrease in Shares Outstanding: 1,909,269 1,909,269 1,909,269 1,909,269 0 0Average Strike Price: 44.31$ 44.31$ 44.31$ 44.31$ 44.31$ 44.31$ Increase in Common Stock Account: 84,599,716 84,599,716 84,599,716 84,599,716 - -

Change in Treasury Stock 307,900,000 307,900,000 307,900,000 307,900,000 307,900,000 307,900,000Expected Price of Repurchased Shares: 227.20$ 240.95$ 255.53$ 271.00$ 287.40$ 304.79$ Number of Shares Repurchased: 1,355,194 1,277,858 1,204,935 1,136,174 1,071,337 1,010,199

Shares Outstanding (beginning of the year) 2,900,000 3,454,075 4,085,487 4,789,821 5,562,916 4,491,580Plus: Shares Issued Through ESOP 1,909,269 1,909,269 1,909,269 1,909,269 0 0Less: Shares Repurchased in Treasury 1,355,194 1,277,858 1,204,935 1,136,174 1,071,337 1,010,199 Shares Outstanding (end of the year) 3,454,075 4,085,487 4,789,821 5,562,916 4,491,580 3,481,381

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol STZCurrent Stock Price $227.20Risk Free Rate 3.07%Current Dividend Yield 2.08%Annualized St. Dev. of Stock Returns 22.97%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 4,108,263 13.86 4.50 194.83$ 800,402,074$ Range 2 5,050,246 20.28 3.90 191.51$ 967,150,704$ Range 3 3,584,802 32.84 6.00 173.23$ 620,995,508$ Range 4 870,304 79.86 9.20 128.95$ 112,223,669$ Total 13,613,615 25.46$ 4.97 205.35$ 2,500,771,955$

DCF Price $251.70 -0.60% -0.70% -0.80% -0.90% -1.00% -1.10% -1.20% -1.30% -1.40%3.95% $526.18 $528.36 $530.53 $532.71 $534.88 $537.05 $539.22 $541.39 $543.554.45% $391.99 $393.67 $395.36 $397.04 $398.72 $400.41 $402.08 $403.76 $405.444.95% $306.69 $308.06 $309.43 $310.80 $312.17 $313.54 $314.91 $316.27 $317.64

WACC: 5.45% $247.71 $248.86 $250.02 $251.18 $252.33 $253.48 $254.63 $255.78 $256.935.95% $204.52 $205.52 $206.52 $207.51 $208.51 $209.50 $210.50 $211.49 $212.486.45% $171.55 $172.43 $173.30 $174.18 $175.05 $175.93 $176.80 $177.67 $178.546.95% $145.57 $146.35 $147.13 $147.91 $148.69 $149.47 $150.24 $151.02 $151.80

DCF Price $251.70 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50% 2.60%16.50% $224.58 $229.97 $235.67 $241.70 $248.11 $254.92 $262.18 $269.93 $278.2317.00% $225.50 $230.96 $236.74 $242.87 $249.37 $256.28 $263.65 $271.51 $279.9317.50% $226.37 $231.90 $237.76 $243.97 $250.56 $257.56 $265.03 $273.00 $281.53

CV ROIC: 18.00% $227.18 $232.79 $238.72 $245.01 $251.68 $258.77 $266.33 $274.40 $283.0418.50% $227.96 $233.63 $239.63 $245.99 $252.74 $259.92 $267.57 $275.73 $284.4719.00% $228.69 $234.43 $240.49 $246.92 $253.75 $261.00 $268.74 $276.99 $285.8219.50% $229.38 $235.18 $241.31 $247.81 $254.70 $262.03 $269.84 $278.18 $287.11

DCF Price $251.70 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50% 2.60%2.32% $300.44 $310.00 $320.27 $331.32 $343.24 $356.15 $370.17 $385.44 $402.152.57% $272.29 $280.20 $288.65 $297.69 $307.38 $317.80 $329.02 $341.16 $354.322.82% $248.14 $254.77 $261.81 $269.31 $277.30 $285.84 $294.99 $304.81 $315.38

Risk-Free Rate: 3.07% $227.20 $232.81 $238.74 $245.03 $251.70 $258.80 $266.36 $274.43 $283.073.32% $208.86 $213.65 $218.70 $224.02 $229.65 $235.62 $241.94 $248.66 $255.813.57% $192.67 $196.79 $201.12 $205.67 $210.46 $215.52 $220.87 $226.52 $232.513.82% $178.27 $181.84 $185.57 $189.49 $193.61 $197.94 $202.49 $207.29 $212.36

DCF Price $251.70 5.30% 5.80% 6.30% 6.80% 7.30% 7.80% 8.30% 8.80% 9.30%3.96% $487.64 $498.19 $509.00 $520.07 $531.40 $543.00 $554.88 $567.04 $579.484.46% $363.46 $371.45 $379.64 $388.03 $396.62 $405.41 $414.41 $423.62 $433.054.96% $284.34 $290.71 $297.24 $303.92 $310.76 $317.77 $324.94 $332.27 $339.78

WACC: 5.46% $229.55 $234.80 $240.18 $245.68 $251.32 $257.09 $263.00 $269.04 $275.235.96% $189.39 $193.82 $198.35 $203.00 $207.75 $212.62 $217.60 $222.70 $227.926.46% $158.69 $162.50 $166.39 $170.38 $174.46 $178.64 $182.92 $187.30 $191.786.96% $134.49 $137.80 $141.19 $144.66 $148.22 $151.86 $155.58 $159.39 $163.29

DCF Price $251.70 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%3.96% $505.34 $511.61 $518.05 $524.64 $531.40 $538.32 $545.42 $552.69 $560.144.46% $376.86 $381.62 $386.49 $391.49 $396.62 $401.87 $407.25 $412.76 $418.404.96% $295.01 $298.81 $302.69 $306.68 $310.76 $314.95 $319.23 $323.63 $328.13

WACC: 5.46% $238.34 $241.47 $244.67 $247.95 $251.32 $254.77 $258.30 $261.92 $265.635.96% $196.80 $199.43 $202.14 $204.91 $207.75 $210.66 $213.64 $216.70 $219.826.46% $165.05 $167.32 $169.64 $172.02 $174.46 $176.96 $179.53 $182.15 $184.836.96% $140.02 $141.99 $144.02 $146.09 $148.22 $150.40 $152.63 $154.91 $157.25

DCF Price $251.70 0.20% 0.70% 1.20% 1.70% 2.20% 2.70% 3.20% 3.70% 4.20%450.00 $170.40 $185.38 $203.87 $227.29 $257.90 $299.62 $359.83 $454.32 $624.02500.00 $169.10 $183.94 $202.28 $225.49 $255.84 $297.19 $356.87 $450.54 $618.77550.00 $167.79 $182.51 $200.68 $223.69 $253.77 $294.76 $353.92 $446.77 $613.53

Annual CAPEX after 2019: 600.00 $166.48 $181.07 $199.08 $221.89 $251.70 $292.33 $350.97 $442.99 $608.28650.00 $165.18 $179.63 $197.48 $220.09 $249.64 $289.90 $348.02 $439.22 $603.03700.00 $163.87 $178.19 $195.89 $218.29 $247.57 $287.47 $345.06 $435.45 $597.78750.00 $162.56 $176.76 $194.29 $216.49 $245.50 $285.04 $342.11 $431.67 $592.53

DCF Price $251.70 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00%3.96% $539.84 $537.74 $535.63 $533.52 $531.40 $529.28 $527.15 $525.01 $522.884.46% $403.16 $401.53 $399.90 $398.26 $396.62 $394.97 $393.32 $391.67 $390.014.96% $316.10 $314.77 $313.44 $312.10 $310.76 $309.42 $308.08 $306.73 $305.38

WACC: 5.46% $255.81 $254.69 $253.57 $252.45 $251.32 $250.19 $249.06 $247.92 $246.785.96% $211.63 $210.66 $209.69 $208.72 $207.75 $206.78 $205.80 $204.82 $203.846.46% $177.87 $177.02 $176.17 $175.32 $174.46 $173.61 $172.75 $171.89 $171.026.96% $151.25 $150.50 $149.74 $148.98 $148.22 $147.46 $146.69 $145.92 $145.15

Equity Value Per ShareSG&A Change

Equity Value Per ShareContinuing Value Growth Rate (g)

Equity Value Per ShareBeer Case (Unit) Growth

Equity Value Per ShareWine & Spirit Case (Unit) Growth

Continuing Value Growth Rate (g)

Equity Value Per ShareContinuing Value Growth Rate (g)

Equity Value Per ShareCOGS Change

Equity Value Per Share