Constellation: Medium-Term Sales Targets Intact on Robust Beer Outlook, Organic Growth in Focus

We plan to maintain our $274 fair value estimate after combing through wide-moat Constellation’s STZ medium-term sales growth and margin targets reaffirmed at the firm’s strategy day event that squared with our projections for the core beer business but moderately exceeded our expectation for the wine and spirits segment. Our 10-year forecasts remain in place for mid-single-digit top-line growth and operating margins averaging in the mid-30s. Shares look undervalued, trading at a 12% discount to our intrinsic valuation, and we suggest long-term investors buy into this leading brewer of premium beers.

We view Constellation’s targets for beer revenue to expand at a 7%-9% pace between fiscal 2024 and 2028 as reasonable, underpinned by prevailing beer premiumization trends and the brewer’s collection of top-selling brands, including Corona, Modelo, and Pacifico that have resonated with beer drinkers, with distribution expanding across U.S. retail and on-premises channels. While we expect the brewer’s plan to expand brewing capacity by 18 million hectoliters over the next five years (a 43% increase from fiscal 2023 levels) to drive up costs in the interim, the firm’s experience in managing similar projects in the past gives us confidence that the beer operating margin targets in the high-30s (similar to historical averages) remain attainable.

On the other hand, we are less enthused about the prospects of its wine and spirits business, forecasting a flattish top line over the next five years versus the 1%-3% annual growth rate in the guidance. We see more pruning as needed for the business, which will erode volumes while pricing will likely stay muted in the next few years as the recently acquired high-end wine and spirits brand builds traction with distributors and consumers. A sluggish top line in wine and spirits, coupled with marketing investments needed, has led us to forecast margins averaging 23.5% for the next five years, below management’s 25%-26% projection.