Constellation Earnings: Modelo Led Strong Premium Beer Growth, but Wine and Spirits Remain a Drag

We plan to maintain our $274 fair value estimate after absorbing Constellation Brands’ STZ solid fiscal second-quarter results, with sales up 7% and adjusted EPS growth (excluding Canopy investments) of 14%, ahead of our projections of 6.5% and 11%, respectively. We are tweaking our 2024 projections to align with the firm’s improved earnings outlook but maintain our 10-year forecasts for mid-single-digit top-line growth and average operating margins in the mid-30s in place. Shares look undervalued, trading at a 12% discount, and we suggest that investors consider buying this wide-moat brewer.

During the quarter, beer sales grew by 12% (versus our 10% projection), driven by a 9% Modelo-led volume expansion and a 3% pricing. While Modelo and Corona continue to resonate with premium drinkers, we model both volume and pricing to moderate in the coming months given seasonality, lower capacity (due to maintenance), and efforts to rein in pricing amid consumer belt-tightening, resulting in our full-year beer sales growth forecast of 8.3%. On the other hand, secular headwinds continue to plague the wine and spirits segment (mostly the midrange brands), driving an 11% organic sales contraction. We see a 6% sales contraction (including divestitures) for fiscal 2024 and revenue for the struggling segment to be flat over the next decade.

Finally, margins narrowed in beer (largely due to capacity expansion and raw material price increases) wine and spirits categories, but strong incremental beer sales, coupled with corporate cost-saving initiatives, still led operating profit to grow 20%. Between higher utilization of new capacity, easing input cost inflation, and marketing expense control, we think our assumption for operating margins to expand 300 basis points to 33% over the next three years remains attainable.