Earnings Preview: Constellation Brands, Inc. (STZ)

Constellation Brands, Inc. (STZ) has made a move to the upside after six of the last eight earnings reports

Oct 4, 2016 at 10:54 AM
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Alcoholic beverage maker Constellation Brands, Inc. (NYSE:STZ) is gearing up to report its fiscal second-quarter earnings ahead of the open tomorrow. The stock has been surrounded by plenty of optimism lately -- and with good reason, as the shares have outperformed over the last several years, and have added 28% in 2016 alone. At the same time, though, the shares have also been struggling to break out of a sideways pattern in the $163-$168 zone over the past few months.

Last Friday, STZ got a boost from reports the company is looking to sell its Canadian wine business, which could fetch upwards of $1 billion. However, the shares are essentially flat today, at $165.50. Perhaps if earnings bring a positive surprise and/or the stock takes another bounce off of its supportive 80-day moving average, STZ will finally break out of its recent holding pattern to conquer its late-August record high at $168.68.

Options traders have taken a call-heavy approach toward the stock, though volume has been relatively light on an absolute basis. Over the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.39 STZ call options for every put. The resulting call/put volume ratio ranks near the top quartile of all readings taken in the last year. Echoing this, the stock holds a Schaeffer's put/call open interest ratio (SOIR) of 0.77 -- lower than 84% of the past year's readings.

But not every call player is a bull. In fact, the out-of-the-money October 175 and 170 calls have seen the largest rises in open interest over the last 10 sessions, and are also home to peak open interest. But data from the major exchanges confirms a number of these positions were sold to open, meaning speculators are betting on the respective strike prices serving as short-term ceilings.

Today, the October 175 call is again the most active strike, and the ISE confirms some positions are being sold to open. Overall, options action is running much hotter than usual ahead of earnings, with calls and puts both changing hands at roughly three times the expected pace for this point in the day.

Currently, options are pricing in a 4.4% swing for tomorrow's post-earnings session -- somewhat wider than STZ's average move of 2.9% in the session subsequent to its past eight reports. History is definitely on the side of the bulls, with the shares making a move to the upside in six of the last eight quarters.

And speaking of bulls, these optimists dominate the scene, even outside of the options pits. Specifically, short interest on STZ fell during the most recent two-week reporting period, and now accounts for just 2% of the stock's total float. Moreover, eight out of nine analysts call Constellation Brands, Inc. (NYSE:STZ) a "buy" or better, without a single "sell" rating on the books.

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