By Zacks Equity Research

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Constellation Brands (STZ) has recently completed the acquisition of Mark West wine brand from California-based Purple Wine Company, LLC. The wine and spirits company paid a total sum of $160 million to complete the acquisition. This strategic move expanded its hard beverage portfolio.

Per the agreement, the acquisition will include some grape supply contracts and wine inventories from three California labels, i.e. a California pinot noir, a Russian River reserve pinot noir and a Santa Lucia reserve pinot noir.

Being the best-selling and fastest growing brand in the U.S., Mark West holds leadership in $10 - $12 price category, registering a growth of 35% in volume in the last 12 weeks. At present, approximately 600,000 cases of Mark West pinot noir are being sold annually in U.S. We believe this acquisition will strengthen Constellation Brands' pinot noir brand portfolio.

At the end of first-quarter fiscal 2013, Constellation Brands had $69.1 million of cash and cash equivalents. Moreover, the company generated $96.4 million and $76.8 million of cash from operations and free cash flow, respectively.

Furthermore, the company has remaining $850 million under its revolving credit facility. Although the company is silent about the source of fund, we expect that the company has utilized a portion of its credit facility to complete the acquisition.

We believe that the company's strategic initiative of expanding footholds in the U.S wine industry along with focus on brand building and promotion will enhance its growth opportunities while strengthening its market position.

Moreover, in an effort to generate strong margins, Constellation Brands is also focusing on higher priced segment across all key categories. The company in a drive to enhance its presence in the U.S. beer market has entered into an agreement with Anheuser-Busch InBev (BUD) to acquire the remaining 50% stake of Crown Imports. Constellation Brands believes that the acquisition will be significantly accretive to its earnings per share and free cash flow.

Constellation Brands is the largest wine company in the world and commands a dominant position in the premium wine segment in the U.S. The company is also a leading producer of wines in Canada and New Zealand. This provides a competitive edge to the company and bolsters its well-established position in the market.

However, the company faces intense competition from other well-established players in the industry, including Beam Inc. (BEAM), Brown-Forman Corporation (BF.B) and Diageo plc (DEO). Moreover, Constellation Brands also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company's future operating performance.

We currently have a Zacks #2 Rank (short-term "buy" rating) on the stock. Our long-term recommendation on the stock remains "neutral."

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