In the quest for growth, certain companies seek to acquire rivals as a primary driver to build market share. Management teams justify their motives by promising shareholders they will be able to integrate new purchases to the corporate fold easily, cut costs and move on to the next target efficiently.

The problem is, making acquisitions often doesn’t always benefit shareholders if it’s a company’s only avenue for growth. The market is filled with examples of companies that eventually stretched into larger and riskier acquisitions. Insurance firm Conseco (NYSE: CNO), for instance, acquired rival insurers with reckless abandon throughout the 1990s, but was brought to ruin after it purchased mobile home lender GreenTree Financial for $6 billion in a deal that proved to be unsustainable. In December 2002, Conseco filed for Chapter 11 bankruptcy.

International Business Machines (NYSE: IBM) also spent the 1990s acquiring a wide array of computer hardware, software and consulting rivals such as Sequent Computer Systems, Lotus Notes and a consulting arm of accountant PriceWaterhouseCoopers. But IBM’s fate was different. It eventually realized hardware was not the only way to prosper. By focusing on its software and consulting businesses, it could grow profits more effectively. The rest is history. IBM has seen its stock double in the past decade, while the stock market has been flat during the same period.

I see a similar situation playing out in wine and spirits firm Constellation Brands (NYSE: STZ).Like IBM, the company spent the 1990s furiously acquiring rival firms to build market share and sales. In 1993, for example, it acquired Chicago-based spirits importer Barton Brands. This was followed by numerous winery purchases, including Paul Masson, Almaden, Gallo and Simi. The serial buyouts continued and peaked around the time Constellation snapped up Robert Mondavi Winery for $1 billion in 2004. The purchase was a huge coup and was covered in detail in the book The House of Mondavi: The Rise and Fall of an American Wine Dynasty.

Shareholders couldn’t have been happier. The stock returned roughly 1,600% from 1992 through June 2005, which ended up being the peak. Eventually, Constellation realized it had bought too many average wine and spirits brands, and was running out of rivals to acquire. Still, 2007 ended up being Constellation’s biggest year of sales, with a reported $5.2 billion in revenue. Unfortunately, sales plummeted to $3.8 billion by 2008, and the company lost $2.83 per share.

Since then, Constellation has worked overtime to get its house in order. It has been moving away from lower-end wine and spirits brands, as well as consolidating operations — including the sale of its Australian, U.K and South African businesses. The sale allowed it to pay down debt from a peak of more than $5 billion in 2008 to $3 billion today.

Given that sales have fallen for nearly five years, most investors are simply assuming Constellation is fading into oblivion. But this couldn’t be farther from the truth. Profit growth has been strong recently. Between 2010 and 2011, for example, operating income jumped 61% to $551 million. This represented an impressive operating margin of 12.3%, which is well ahead of the industry average of 8.4%.

I like to look at free cash flow as a measure of the excess capital a company generates. From this perspective, Constellation gets a high grade. Free cash flow was also strong in 2011, at $530 million, or $2.53 per diluted share. Better yet, it expects free cash flow to reach as high as $750 million for 2012, or roughly $3.60 per diluted share.

Today, Constellation’s remaining businesses consist of higher-end wine and spirits brands, including Ravenswood, Blackstone, Svedka Vodka, and the import rights to Corona and Tsingtao beers in the United States. And this seems to be the sweet spot of the industry. Larger rivals such as Diageo (NYSE: DEO) and Brown-Forman (NYSE: BF-B) also own an array of high-end brands, and their stock prices have benefited greatly from this positioning in the market. I expect the same to hold true for Constellation.
           
Action to Take -> Constellation’s valuation is extremely compelling. Its forward free cash flow multiple is less than 6 currently, which, to me, implies the market doesn’t expect the company to grow ever again. It may take another year for Constellation to find its sales footing, but analysts expect respectable sales growth of 4% in 2013 and total sales of close to $3 billion. Through the next year, I fully expect the market to start realizing Constellation is in a much stronger competitive position.

Fundamentally, it now owns a basket of strong spirits brands that are likely to see stable sales and growth potential. In addition, the free cash flow multiple could rise to the industry average of 12 by the end of 2013. This implies the stock price can double from $21 to $42 in a couple of years. And with any level of sales and profit growth going forward, the stock could eventually reach $50, which I think is achievable within three years. This type of performance would make IBM investors jealous.