UNIVERSITY OF OREGON June 4th, 2009

INVESTMENT GROUP Consumer Goods

CONSTELLATION BRANDS, INC.

RECOMMENDATION: HOLD

Stock Data
Price (52 weeks) $10.66 - $23.48
Symbol/Exchange STZ/ NYSE
Beta .84
Shares Outstanding 221.00M
Average daily volume 31,550.77
(3 month average)
Current market cap 2.5B
Current Price $12.05
Dividend N/A
Dividend Yield

Valuation (per share)

DCF Analysis $16.14
Comparables Analysis $12.79
Current Price $12.05
(as of 6/01/2009)
Target Price
$14.46

Summary Financials
(FY2009)
Revenue $3654.40
Net Income ($301.18)
Operating Cash Flow ($127.91)

BUSINESS OVERVIEW

Based in Fairport, NY, Constellation Brands, Inc. is a leading international producer and marketer of over 200
alcoholic beverage brands, which consist of premium wines, premium spirits, imported beers and other select
alcoholic beverage products. The company has the largest wine business in the world and has a leading market
position in each of its core markets, which include the United States, Canada, United Kingdom, Australia and

Covering Analyst: Tom Costello

Email: tcostell@uoregon.edu

The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
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New Zealand. Constellation Brands conducts business through entities it wholly owns as well as through a variety
of joint ventures, both inside and outside the US.

Effective January 2, 2007, Constellation Brands portfolio was divided into new segments: Constellation Wine,
Constellation Spirits, and Crown Imports (which now includes Constellation Beers).

Constellation Wines is the leading producer and marketer of wine in the world. It sells a large number of wine
brands across all categories – table wine, sparkling wine and dessert wine – and across all price points – popular,
premium, super-premium and fine wine. Constellation Wines well-known brands include: Robert Mondavi
Brands, Franciscan Oakville Estate, Wild Horse, Simi, Toasted Head, Estancia, Clos du Bois, Blackstone,
Ravenswood, Black Box, Vendange, Arbor Mist, Inniskillin, Kim Crawford, Ruffino, Nobilo, Jackson-Triggs,
Alice White, Hardys, Banrock Station, Stowells, and Kumala.

Constellation Spirits produces, bottles, imports, and markets a diversified line of distilled spirits. In March 2009,
the company sold its “value” spirits business while retaining the Svedka and Black Velvet premium spirit brands.
Both of these brands have a leading position in their respective categories. The spirits brand now exclusively
focuses on premium spirits.

Crown Imports operating segment consists of a joint venture with Grupo Modelo. This venture gives
Constellation Brands the exclusive right to import, market, and sell Corona Extra, Corona Light, Coronita,
Modelo Especial, Pacifico, Negra Modelo, St. Pauli Girl and Tsingtao. In the U.S., Crown Imports has six of the
top-selling 25 imported beer brands. Corona Extra is the best-selling imported beer and the sixth best-selling beer
overall. Corona Light is the leading imported light beer while St. Pauli Girl is the number two selling German
Beer and Tsingtao is the number one selling Chinese Beer.

Each of the Company’s segments employ full-time marketing, sales, and customer service organizations.

BUSINESS AND GROWTH STRATEGIES

The company’s business strategy is to remain focused on consumer preferred premium wine brands,
complemented by premium spirits and imported beers. The company intends to continue to invest in fast growing
premium product categories and geographic markets in order to capitalize on its size and scale in the marketplace
to profitably grow the business. The company remains committed towards its long-term financial model of
growing sales (both organically and through acquisitions), expanding margins, and increasing cash flow to
achieve earnings per share growth and improve return on invested capital.

In order to mitigate the impact of the challenging economic conditions, the company is focusing on a “Global
Initiative” strategy, which includes improving operating efficiencies, containing costs, optimizing cash flow, and
increasing return on invested capital. The cost saving effects of the “Global Initiative” is expected in 2011.

To capitalize on current industry trends, Constellation Brands has employed a strategy of growth by focusing on
internal growth, acquisitions in joint ventures, and increasing focus on higher-margin premium categories of the
beverage alcohol industry. Key elements of Constellation Brands strategy include:

• Leveraging its existing portfolio of leading brands;

• Developing new products, new packaging, and line extensions;

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• Strengthening relationships with wholesalers and retailers;

• Expanding distribution of its product portfolio;
• Enhancing production capabilities;
• Realizing operating efficiencies and synergies;
• Maximizing asset utilization;
• Acquiring additional management, operational, marketing, and product development expertise.

Over the last two fiscal years, the company has complemented this strategy by divesting certain businesses,
brands, and assets as part of its efforts to increase its mix of premium brands, improve margins, create operating
efficiencies, and reduce debt. This divesting includes several wineries that were acquired during the Fortune
Brands acquisition in 2007 (lower margin and lower quality wine brands “Almaden” and “Ingelnook”), and the
sale of its “value spirits” brand as seen in the “Recent News” section (March 2009).

During Fiscal 2009, an increasingly challenging global economic environment has contributed to the slowing of
premium wine growth in the short-term, but the Company believes consumers will continue to trade up to
premium wines over the long-term.

PORTFOLIO HISTORY

Svigals Portfolio
12/6/06 - Purchased 124 shares at a price of $28.12
Total cost basis of 3,494.88
59.48% return since purchase

Tall Firs Portfolio

1/3/2004 - Purchased 448 shares at a price of $16.77
Total cost basis of 7,510.75
31.05% return since purchase

RECENT NEWS

March, 2009 - As part of its strategic focus on higher-margin premium brands in its portfolio, the company sold
its value spirits business for $330.5 million. Net proceeds of $210 million, will be used to reduce debt. The
company retained the SVEDKA Vodka and Black Velvet Canadian Whiskey premium spirit brands, which have
scale in the marketplace and higher margins than the value spirits brands that were sold. To achieve synergies and
operating efficiencies, these brands will be consolidated into the Company’s North American wine operations.
The Paul Masson Grande Amber Brandy brand, which is already being managed by the Company’s North
American wine business, was also retained.

April, 2009 - Andy Berk, CEO of Constellations Beers and Spirits, and the President and CEO of Constellation
services retired May 31st, 2009. However, he has agreed to provide consultation services to the company for up to
one year. He has been in the beverage alcohol industry for most of his career.

INDUSTRY

During the past 10 years, there have been certain key trends within the beverage alcohol industry, which include:

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• Consolidation of suppliers, wholesalers and retailers;

• An increase in global wine consumption, with premium wines growing faster than value-priced wines;
and
• In the U.S. within the beer category, high-end beer (imports and crafts) growing faster than domestic beer.

The beverage alcohol industry is highly competitive. The company competes on the basis of quality, price, brand
recognition, and distribution strength. The company’s beverage alcohol products compete with other alcoholic
and non-alcoholic beverages for consumer purchases, as well as shelf space in retail stores, restaurant presence
and wholesaler attention. The company competes with numerous multinational producers and distributors of
beverage alcohol products, some of which may have greater resources than the company.

Although there will always be high demand for alcoholic beverages during times of recession, consumers have
been changing their brand preferences. Due to the current economic conditions, consumers are shifting away from
the more popular, premium brands to purchase value priced alcoholic beverages. Consumers have become much
more price sensitive during the economic unrest, and demand for these more expensive products is falling.

S.W.O.T. ANALYSIS

Strengths:

• Brand Recognition: Many of Constellation Brands products are recognized leaders in their respective
categories and geographic markets. The company’s strong market positions make it a supplier of choice to
many of its customers, who include wholesale distributors, retailers, on-premise locations, and
government alcohol beverage control agencies.

• Leading Producer and Marketer of Wine: Constellation Wines sell brands in all 3 categories: table
wine, sparkling wine, and dessert wine. They also market to all price points: popular, premium, super
premium, and fine wine.

Weaknesses:

• High Debt level: Substantial debt has been incurred to finance acquisitions in the past, and will probably
be used in the future to finance further acquisitions. The company’s ability to pay their debt obligations
will depend upon their operating performance, which is largely impacted by the economy. Current debt
obligations will greatly decrease future acquisitions in the short and long term.

• Low Cash Reserves: In the 4th quarter for 2009, Constellation Brands released that it only has $13.1
million in cash and short-term investments. Considering the maturity of its long-term debt ($129 million)
in November of 2009, Constellation Brands is going to need to make some drastic changes to pay off its
debt.

Opportunities:

• Popularity of Premium Products: Although premium wines, spirits, and imported beer are not popular
in times of recession, when the economy revives itself in the long run, Constellation Brands will find
itself in a very profitable positions because of the large market share they have obtained. Industry trends
have shown that global wine consumers prefer the premium wine brands and will pay the extra money to
obtain them when they are not in such poor economic conditions.

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Threats:

• Economic conditions: Current economic conditions could continue to impact financial performance.
Risks including further economic slowdown, volatility, and the tightening of credit and capital markets
could adversely impact the company and their major suppliers, distributors and retailers. The inability of
suppliers, distributors, or retailers to conduct business or access liquidity could impact Constellation
Brands ability to produce and distribute their products.

• Government regulations: Constellation Brands distributes products all across the world making
company vulnerable to outside countries import taxes. Also, Government regulations within many US
states have already, or are currently considering, raising alcohol excise taxes in an effort to raise funds to
fight the current depression. The U.K. has been a consistent example of these problems as they have
continually increased taxes on alcohol imports throughout the past year.

PORTER S 5 FORCES ANALYSIS

Supplier Power: Moderate, Increasing

Constellation owns and leases only a small portion of their overall wine needs, therefore the majority of their
grapes come from independent suppliers. Written contracts with these independent growers are priced on a year-
to-year basis. The company believes it has adequate sources of grape supplies to meet their sales expectations. If
demand exceeds supply, Constellation would seek to the extra grapes from the bulk wine markets. The many
diverse locations of wineries around the world hedge Constellation from environmental risks that could decrease
their supply of grapes.

Barriers to Entry: High, Stable

Barriers to entry are high in this industry due to the high competition and the long process required to establish a
new winery. Start-up costs are very expensive, funding is hard to obtain, and returns are not realized for long
periods of time. There are also particular skills and knowledge, which are essential to succeed in this industry.

Buyer Power: High, Increasing

Consumers who shop for a “premium” brand wine are very particular and sophisticated when it comes to the
quality of the wine. Although these buyers are not usually very price sensitive, due to the recent economic
downturn, many have cut back on their purchases. The recent decrease in revenue during the recession is evidence
of the buyer power in this industry, and especially with the “premium” brands.

Threat of Substitutes: High, Stable

The wine market is highly competitive and offers a large selection of available substitutes. Other alcoholic
beverages such as beer and spirits are increasing in popularity as well. New trends include consumers shifting
towards healthy lifestyles and substitute alcoholic products for more healthy choices such as water. However,
there is still a very significant market for alcoholic beverages, and Constellation has a significant position holding
over 200 alcoholic brands.

Degree of Rivalry: Moderate, Stable

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With so many privately held wineries around the world, the industry is difficult for any one brand to dominate.
This creates a highly competitive market with a large selection of substitutes.

CATALYSTS

Upside:

• If economic conditions improve, Constellation Brands will benefit due to the increasing popularity of
premium wine, spirits, and imported beer.

• If the “Global Initiative” is effective for Constellation Brands, they will have stronger internal operations,
can cut costs, and will be ready to increase their market share through acquisitions in the future.

Downside:

• If Constellation Brands cannot pay their current debt obligations, they will have drastic financial
problems in the future. There are four options for Constellation Brands to choose from to raise cash to
fund their current debt – (1) take out more long-term debt to finance the current debt, (2) liquidate their
inventory levels at a loss, or (3) sell part of their operations. I project that the company will do some sort
of combination of these options to finance their debt. These debt obligations will substantially decrease
Constellation’s options for expansion in the future and will raise their cost of debt.

• If government regulations on alcohol continue to rise in the form of excise and duty taxes, Constellation
Brands will have to continue to raise its prices. This will continue to decrease their revenues in an
economy where the consumer is searching for the “value” brands.

COMPARABLES ANALYSIS

The most appropriate companies to compare with Constellation would be ones that are highly focused on wine
production and sales. Unfortunately, the majority of the companies that fit this description were all privately held
companies, including the majority in Constellation’s annual report. Therefore, I came to the conclusion that
Brown-Forman Corp. and Diageo PLC would be the best companies to compare with Constellation. Brown-
Forman focuses on wine as its main product and serves many of the same geographical markets as Constellation.
Diageo is another good company to compare to Constellation because it has a very well recognized brand
portfolio and has a very large market share in the alcoholic beverage industry. However, I found Brown-Forman’s
business operations to compare more closely to Constellation Brands than Diageo’s, and therefore gave Brown-
Forman a higher weighting (60%) than Diageo (40%) in my comparables analysis.

Brown-Forman Corp. (BF-B) – 60%

The Brown-Forman Corporation manufactures, bottles, imports, exports, and markets a variety of alcoholic
beverage brands across the wine and spirit segments. The company’s spirits include: Jack Daniel's, Canadian
Mist, Southern Comfort, Finlandia, Old Forester, Early Times, Woodford Reserve, Pepe Lopez, Tuaca, Don
Eduardo, Appleton and Amarula. The Company's wine brands are Fetzer, Bolla, Five Rivers, Fontana Candida,
Korbel, Mariah and Michel Picard. In the United States, Brown-Forman sells spirits and wines either through
wholesale distributors or directly to state governments in those states that control alcohol sales. Outside the
United States, the Company distributes its products through local distributors. The company exports its products
to the United Kingdom, Australia, Germany, Spain, Italy, Japan, Canada and France. Constellation and the
Brown-Forman Corporation both focus on wine as their main product, and they both serve many of the same
geographical markets: The US, United Kingdom, Australia, and Canada.

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Diageo PLC (DEO) – 40%

Diageo PLC produces and distributes an international collection of branded premium spirits, beer and wine.
Popular Diageo brands include: Smirnoff vodka, Johnnie Walker Scotch whiskies, Guinness stout, Baileys
Original Irish Cream liqueur, Captain Morgan rum, J&B Scotch whisky and Tanqueray gin. In addition, it also
owns the distribution rights for the Jose Cuervo tequila brands in the United States and other countries. Diageo's
beer brands include Guinness. Diageo’s is much larger than Constellation Brands, but they both have very well
recognized brands in their portfolio of alcoholic beverages (although Diageo is more concentrated in the spirit
segment than wine).

Valuation Metrics
I used three metrics for my comparables analysis: EV to Operating Cash Flows, EV to EBITDA, and EV to
Revenue. I applied standard metrics that provide an overall picture of how the companies compare. I weighted the
metrics equally (1/3). During this comparison, I noticed that Constellation compared favorably to the other
companies in the EV/Revenues ratio, but did not compare well in the EV/ Operating Cash Flows ratio or the EV/
EBITDA ratio. The EV/ Revenues ratio shows that Constellation was able to generate very strong revenue
numbers considering the size of the company. The EV/ EBITDA and EV/ Operating Cash Flows however, show
that Constellation was very inefficient turning their revenue into significant earnings or cash flow. This analysis
brings me to believe that the reason for the high EV/EBITDA and EV/ Operating Cash Flow is because
Constellation has very inefficient internal operations. The company must recognize this problem as well, and is
probably one of the main reasons for their “Global Initiative”.

DISCOUNTED CASH FLOW ANALYSIS

I used the percentage of sales method to create my discounted cash flow analysis. I derived my beta by regressing
Constellation Brand’s 5-year monthly returns against the S&P 500’s returns. This regression gave me a beta of .84
with a standard error of .3029 and a test statistic of 2.7730.

Revenues

Due to the high levels of economic threats that have recently affected the company’s revenues, Constellation
Brands is taking the next two years to focus on their internal operations to ensure efficiency. Constellation’s
“Global Initiative” states that they plan to simplify the business, increase internal efficiencies, and reduce its cost
structure on a global basis. This includes eliminating 5% of their global workforce and the closure a certain office,
production facility, and warehouse facility. The overall goal is to maximize asset utilization, reduce costs, and
improve long term return on invested capital. All costs savings from the “Global Initiative” will be realized in
2011. Due to the recent state of the economy, consumers have substituted premium brand wines for value priced
wines. This has dramatically effected Constellation Brands revenues, and I project will continue to do so for the
next 2 years (2010-2011).

After 2011, I project that the economy will begin to heal itself from the current recession. During this time,
consumers will begin to trade-up from value-priced alcoholic beverages towards premium alcoholic beverages.
As consumers begin to support premium alcoholic brands, Constellation Brands will find themselves in a very
favorable position in the premium brands market. Their revenues will substantially increase for the next three
years (2012-2014) and then level out to around 3% growth for the next five years.

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Cost of Goods Sold

The types of costs included in cost of goods sold are largely raw materials (grapes, grape juice concentrate, grains,
and alcohol) and packaging materials (glass bottles, caps, corks, capsules, labels, wines bags and cardboard
cartons). Due to environmental factors, it is hard to predict how abundant raw materials are going to be in the
future. However, Constellation Brands has acquired many vineyards among many different countries (US,
Canada, UK, Australia, and New Zealand), which considerably diversifies them against environmental risk. Glass
bottle costs are one of the largest components of COGS, and are currently supplied by only a few firms. However,
the company has many long-term contracts with these providers to protect them from price fluctuations. Due to
the effects of the “Global Initiative”, the company will become more efficient, and will be able to cut down on
their product costs. Therefore, I project COGS to decrease to 65% of revenues for the next four years, and then
slowly increase as Constellation makes an effort to expand their operations in the future.

Selling, General, and Administrative Costs

Over the past couple of years, SG&A have mainly been affected by the costs relating to acquisitions and the
company’s plans to invest in operations and distribution. The company is currently pursuing a “Global Initiative”
and no acquisitions are planned for the next couple of years due to current negative cash flows and high debt
levels. Therefore, I project that Constellation Brands will be successful in lowering their SG&A over the next two
of years, and will continue to do so throughout the future as the company becomes more efficient in their
operations (20% of revenues).

Net Working Capital

I forecasted current assets and current liabilities separately when deriving my NWC. The “Global Initiative”
includes plans to close offices, production facilities, and warehouses which will lower current assets in the years
2010 -2011. However, as the company begins to realize positive cash flow in 2012, they will increase their assets
by funding some small expansions. Current assets will then remain relatively steady and eventually begin to
decrease as the company becomes more efficient with their assets.

Current liabilities grow at a very significant rate in 2010 (65%) due to the long-term debt of $129 million that
comes to maturity in November 2009. After the firm pays off its 2009 debt, current liabilities will continue to
remain historically high due to the large amounts of debt needed to fund company operations in the future.

Capital Expenditures

Due to the current economic hardships and debt obligations in the near future, Constellation will not have
sufficient amounts of cash to fund any expansions in the short run. However, once economic conditions improve
(increasing revenues) and the gains from the “Global Initiative” have been realized (cutting costs), I project that
Constellation will be able to pursue some small expansion efforts. I forecast the company will probably be able to
afford capital expenditures around 5% of revenues during 2012 to 2015, or may have one large expansion during
this time period that will be equal to 5% of revenues over the 4-year period. I projected these capital expenditure
numbers relatively low according to historical standards because Constellation is going to have financial troubles
in the future due to high debt obligations.

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RECOMMENDATION

The short term “Global Initiative” should help Constellation Brands lower their costs by simplifying their
business operations, increasing efficiencies, eliminating workforce, and selling off assets. Although the company
may cut cost from the “Global Initiative”, they will still have to make some drastic changes in order to pay off its
current debt obligations. According to Constellation Brands fourth quarter financial statements, they only have
$13 million in cash and short-term investments to pay off a $129 million debt that matures in November 2009.
Therefore, Constellation is going to have to employ some drastic strategies, which may include: (1) taking out
more long term debt, (2) liquidating inventory at a loss, or (3) selling off part of their operations. I have projected
that Constellation Brands will use a combination of the three strategies to raise the needed capital. However, these
long-term debt obligations are going to continue to haunt Constellation (in the form of high costs of debt and
access to liquidity) and will dramatically affect any expansion efforts the company has in the future.

I project that this economy will rise out of the current recession in 2012-2013. During this time, consumers will
begin to trade-up from value-priced alcoholic beverages towards premium alcoholic beverages. Constellation
Brands has a very strong portfolio of premium brand products, and will be able to effectively increase their
revenue and profits during this time. This increase in revenues will help the company pay off some of its high
debt obligations in the future.

Overall, I rate this company as a HOLD for all portfolios. I received implied prices that were undervalued for both
my discounted cash flows analysis and my comparables analysis. I believe this company is currently undervalued
because investors are looking into the short term and realizing the high risk Constellation has from its debt
obligations. However, I have projected my analysis into the long term and believe that after the economy
rebounds, Constellation Brands will be able to thrive with its strong portfolio of industry preferred premium
brands.

Prices Weighting
Comparables Implied Price $12.79 50%
DCF Implied Price $16.14 50%
Weighted Implied Price $14.46 100%
Current Price $12.05
Undervalued 20%

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APPENDIX 1 COMPARABLES ANALYSIS

Constellation Brands (STZ) Diageo PLC (DEO) Brown-Forman Corp. (BF-B) Weighted Average
Weight 40% 60% 100%
Current Price 12.05 53.87 45.48 48.84
Price (52 Weeks) 10.66-23.48 40.93-79.50 34.97 - 63.024 $37.35 - $69.61
Shares Outstanding 221.00 623.00 150.21 339.33
Average Daily Volume 31,551 74,065 47,985 58,417
Beta 0.84 0.68 0.78 0.74
Market Cap 2,663.05 33,561.01 6,831.55 17,523.33
Long-Term Debt 3,971.10 1,769.00 1,060.00 1,343.60
Enterprise Value 6,634.15 35,330.01 7,891.55 18,866.93
NWC (mrq) 1,208 2,728,082 472,000 1,374,432.80
Revenues (ttm) 3,655 16,143 3,282 8426.31
EBITDA (ttm) 180 5,162 693 2,480.64
OCF (ttm) (128) 3,113 534 1,565.53

Valuation Multiples Implied Value Multiple Weights

EV/Revenues 1.82 2.19 2.40 2.32 $ 38.34 0.33
EV/ EBITDA 36.86 6.84 11.39 9.57 $ 7.79 0.33
EV/ OCF -51.87 11.35 14.78 13.41 $ (7.76) 0.33
Implied Price $ 12.79
Current Price $ 12.05
Undervalued 6%

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APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS

(All amounts in millions of US dollars) 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
Wine Sales 3235.40 2755.70 3016.90 3015.30 3045.45 3091.13 3322.97 3522.35 3663.24 3773.14 3886.33 4002.92 4123.01 4246.70
% of Total Sales 0.70 0.53 0.80 0.83 0.821 0.816 0.799 0.786 0.781 0.777 0.774 0.772 0.770 0.770
Growth Rate 13.5% -14.8% 9.5% -0.1% 1.0% 1.5% 7.5% 6.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Beer and Spirit Sales 1368.00 2460.70 756.10 639.30 664.87 694.79 833.75 958.81 1025.93 1082.35 1136.47 1181.93 1229.21 1266.08
% of Total Sales 0.30 0.47 0.20 0.17 0.179 0.184 0.201 0.214 0.219 0.223 0.226 0.228 0.230 0.230
Growth Rate 10.7% 79.9% -69.3% -15.4% 4.0% 4.5% 20.0% 15.0% 7.0% 5.5% 5.0% 4.0% 4.0% 3.0%
NET SALES 4603.50 5216.40 3773.00 3654.60 3710.33 3785.93 4156.72 4481.16 4689.17 4855.49 5022.81 5184.85 5352.22 5512.79
% Growth 12.6% 13.3% -27.7% -3.1% 1.5% 2.0% 9.8% 7.8% 4.6% 3.5% 3.4% 3.2% 3.2% 3.0%

Cost of Product Sold (COGS) 3278.90 3692.50 2491.50 2424.60 2430.26 2460.85 2701.87 2912.75 3071.41 3204.63 3315.05 3422.00 3532.47 3666.00
% of Revenue 71.2% 70.8% 66.0% 66.3% 65.5% 65.0% 65.0% 65.0% 65.5% 66.0% 66.0% 66.0% 66.0% 66.5%
GROSS PROFIT 1324.60 1523.90 1281.50 1230.00 1280.06 1325.07 1454.85 1568.41 1617.76 1650.87 1707.75 1762.85 1819.75 1846.78
% of Revenue 28.8% 29.2% 34.0% 33.7% 34.5% 35.0% 35.0% 35.0% 34.5% 34.0% 34.0% 34.0% 34.0% 33.5%
Selling, general and administrative expenses 612.40 768.80 807.30 830.40 816.27 795.04 831.34 896.23 937.83 971.10 1004.56 1036.97 1070.44 1102.56
% of Revenue 13.3% 14.7% 21.4% 22.7% 22.0% 21.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
OPERATING (LOSS) INCOME (EBIT) 666.10 699.00 -356.70 23.00 463.79 530.03 623.51 672.17 679.93 679.77 703.19 725.88 749.31 744.23
% of Revenue 14.5% 13.4% -9.5% 0.6% 12.5% 14.0% 15.0% 15.0% 14.5% 14.0% 14.0% 14.0% 14.0% 13.5%
Equity in earnings of equity method investees 0.80 49.90 257.90 186.60 189.60 193.46 212.41 228.99 239.62 248.12 256.67 264.95 273.50 281.70
% of Revenue 0.0% 1.0% 6.8% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1%
Interest expense, net 268.70 341.80 316.40 931.29 344.52 378.26 407.79 426.71 441.85 457.08 471.82 487.05 501.66
% of Revenue 5.2% 9.1% 8.7% 25.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
Interest Income 5.40 5.70 3.80 3.71 3.79 4.16 4.48 4.69 4.86 5.02 5.18 5.35 5.51
% of Revenue 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Interest Expense 189.70 263.30 336.10 312.60 927.58 340.73 374.10 403.30 422.03 436.99 452.05 466.64 481.70 496.15
% of Revenue 4.1% 5.0% 8.9% 8.6% 25.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
(LOSS) INCOME BEFORE INCOME TAXES 477.20 535.30 -440.60 -106.80 -277.90 378.97 457.65 493.38 492.83 486.03 502.78 519.00 535.76 524.27
% of Revenue 10.4% 10.3% -11.7% -2.9% -7.5% 10.0% 11.0% 11.0% 10.5% 10.0% 10.0% 10.0% 10.0% 9.5%
Provision for income taxes 152.70 203.41 171.83 194.38 97.27 132.64 160.18 172.68 172.49 170.11 175.97 181.65 187.52 183.49
% of Revenue 3.3% 3.9% 4.6% 5.3% 2.62% 3.50% 3.85% 3.85% 3.68% 3.50% 3.50% 3.50% 3.50% 3.33%
Tax Rate 0.32 0.38 0.39 1.82 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35
NET (LOSS) INCOME 324.50 331.89 -612.43 -301.18 -375.17 246.33 297.48 320.69 320.34 315.92 326.81 337.35 348.24 340.77
Net Margin 7.0% 6.4% -16.2% -8.2% -10.1% 6.5% 7.2% 7.2% 6.8% 6.5% 6.5% 6.5% 6.5% 6.2%
Add back Depreciation/ Amort. 128.10 139.30 165.90 157.00 160.93 165.11 171.71 178.58 185.73 193.15 198.95 204.92 211.06 217.40
% of Revenue 2.8% 2.7% 4.4% 4.3% 2.50% 2.60% 4.00% 4.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00%
Add back Interest Expense*(1-tax rate) 129.00 163.25 205.02 -256.33 602.93 221.48 243.17 262.15 274.32 284.05 293.83 303.31 313.10 322.50
% of Revenue 2.8% 3.1% 5.4% -7.0% 16.3% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9%
Current Assest 2700.90 3023.30 3199.00 2534.50 2226.20 2271.56 2577.17 2912.75 3047.96 3156.07 3214.60 3318.31 3371.90 3473.06
% of Revenue 58.7% 58.0% 84.8% 69.4% 60.0% 60.0% 62.0% 65.0% 65.0% 65.0% 64.0% 64.0% 63.0% 63.0%
Current Liabilities 1298.10 1591.10 1718.30 1326.40 2411.71 1703.67 1662.69 1702.84 1781.88 1747.98 1808.21 1762.85 1819.75 1874.35
% of Revenue 28.2% 30.5% 45.5% 36.3% 65.0% 45.0% 40.0% 38.0% 38.0% 36.0% 36.0% 34.0% 34.0% 34.0%
Net Working Capital 1402.80 1432.20 1480.70 1208.10 -185.52 567.89 914.48 1209.91 1266.08 1408.09 1406.39 1555.46 1552.14 1598.71
% of Revenue 30.5% 27.5% 39.2% 33.1% -5.0% 15.0% 22.0% 27.0% 27.0% 29.0% 28.0% 30.0% 29.0% 29.0%
Changes in NWC 29.40 48.50 -272.60 -1393.62 753.41 346.59 295.43 56.16 142.02 -1.71 149.07 -3.31 46.56
% of Revenue 0.6% 1.3% -7.5% -37.6% 19.9% 8.3% 6.6% 1.2% 2.9% 0.0% 2.9% -0.1% 0.8%
CASH FLOW FROM OPERATIONS 581.59 605.03 -290.01 -127.91 -1004.93 -120.49 365.77 465.99 724.22 935.14 821.30 696.51 875.72 834.10
% of Revenue 12.6% 11.6% -7.7% -3.5% -27.1% -3.2% 8.8% 10.4% 15.4% 19.3% 16.4% 13.4% 16.4% 15.1%
Capital Expenditures 40.70 1247.50 1289.90 -100.90 37.10 37.86 207.84 224.06 234.46 242.77 200.91 207.39 240.85 248.08
% of Revenue 0.9% 23.9% 34.2% -2.8% 1.0% 1.0% 5.0% 5.0% 5.0% 5.0% 4.0% 4.0% 4.5% 4.5%
FREE CASH FLOW 540.89 -642.47 -1579.91 -228.81 -1042.04 -158.35 157.93 241.93 489.76 692.37 620.39 489.12 634.87 586.03
PRESENT VALUE OF FREE CASH FLOW (968.15) (136.69) 126.66 180.27 339.07 445.34 370.75 271.58 327.51 280.88

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Constellation Brands, Inc. university of oregon investment group
h t t p : //uo i g. uo r e go n . e du

APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS

Tax Rate 35%

Risk Free Rate 3.4650%
Risk Premium 7%
Beta 0.84
Cost of Equity (CAPM) 9.345%
% of Equity 39.776%
Cost of Debt 10.00%
% of Debt 60.224%
WACC 7.63%
Terminal Growth Rate 3.00%
PV Sum of FCFs 1,237.23
Terminal Value 13,032.32
PV of Terminal Value 6,246.30
Firm Value 7,483.53
Long-Term Debt 3,971.10
Equity Value 3,512.43
Shares Outstanding 217.659
Implied Share Price $16.14
Current Share Price $12.05
Valuation 33.92%

APPENDIX 4 BETA SENSITIVITY ANALYSIS

Standard Under(Over)
Beta Deviation Implied Price Valued
1.4458 2 5.45 -55%
1.2943 1.5 7.50 -38%
1.1429 1 9.89 -18%
0.9914 0.5 12.73 6%
0.84 0 16.14 34%

0.6885 -0.5 20.28 68%

0.5371 -1 25.40 111%
0.3856 -1.5 31.88 165%
0.2342 -2 40.30 234%

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Constellation Brands, Inc. university of oregon investment group
h t t p : //uo i g. uo r e go n . e du

APPENDIX 5 – IMPLIED PRICE ANALYSIS

DCF Weightings Implied Price Comps Weightings

100% $16.14 0%
75% $15.30 25%
50% $14.46 50%
25% $13.63 75%
0% $12.79 100%

APPENDIX 6 – SOURCES

• Constellation Brands Annual Report (10-K)

• Standard and Poor’s Net Advantage
• Factset
• IBIS World
• Yahoo! Finance
• www.cbrands.com

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