Company Reports

We don’t plan any material changes to our $275 fair value estimate after absorbing wide-moat Constellation Brands’ fiscal 2024 results and fiscal 2025 outlook that align with our forecast. Revenue grew 5% as the strength of its premium beer portfolio (over 80% of total sales) more than offset persistent weakness in wine and spirits, while adjusted EPS was up 13% on expense leverage, cost reduction, and lower interest expenses. We are maintaining our fiscal 2025 projections for 6.4% sales growth and $13.70 adjusted EPS, which align with the firm’s outlook for 6%-7% sales growth and adjusted EPS of $13.50 to $13.80. Our 10-year forecasts for a 6% sales compound annual growth rate and 33% average operating margin remain in place.

We award a wide moat rating to Constellation Brands on the basis of the strong brand equity and tight distributor relations that the company’s top-selling Mexican beer portfolio enjoys, as well as some scale-based cost advantages in procurement and advertising.

We don’t plan any material changes to our $274 fair value estimate after absorbing wide-moat Constellation Brands’ mixed third-quarter fiscal 2024 results. Total sales rose just 1% as healthy beer growth (up 4%) was offset by weakness in the wine and spirits portfolio (down 8%), but adjusted EPS (excluding Canopy investments) still rose 8% thanks to beer margin expansion (up 100 basis points to 38.5%) driven by in-market execution and efficiency gains. We plan to trim our estimates for the small wine and spirits segment (16% and 11% of year-to-date sales and operating profit, respectively), but our 10-year projections for 6% beer sales growth and high-30s operating margins remain intact. Following a 2% pop on the report, shares remain undervalued at a 10% discount.

We plan to maintain our $274 fair value estimate after combing through wide-moat Constellation’s 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 award a wide moat rating to Constellation Brands on the basis of the strong brand equity and tight distributor relations that the company’s top-selling Mexican beer portfolio enjoys, as well as some scale-based cost advantages in procurement and advertising.

We plan to maintain our $274 fair value estimate after absorbing Constellation Brands’ 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.

Despite continued inflationary pressure, wide-moat Constellation Brands delivered solid fiscal 2024 first-quarter results that tracked largely in line with our expectations. However, we plan to raise our $274 fair value estimate by a low-single-digit percentage to account for time value. With the shares trading at a 10% discount to our fair value estimate, we suspect investors undervalue Constellation’s advantageous position in the upscale beer category, supported by premiumization trends and strong distributor relationships.

We award a wide moat rating to Constellation Brands based on the strong brand equity and close distributor relations that the company’s top-selling Mexican beer portfolio enjoys, as well as some scale-based cost advantages in procurement and advertising.

We don’t plan to materially change our $274 fair value estimate for wide-moat Constellation Brands, after absorbing the brewer’s solid fiscal 2023 (ended in February) full-year results that included revenue of $9.5 billion and adjusted EPS of $10.65 (excluding impairments in the Canopy investment), which are both within a stone’s throw from our estimates ($9.5 billion and $10.74 billion, respectively). Our 10-year forecast for mid-single-digit sales growth and operating margins averaging 33% remain in place. Current share price implies an 18% discount, which we view as offering a good entry point for long-term investors.

Constellation Brands has earned a wide moat rating from us, thanks to the brand prowess and tight distributor relations afforded by its top-selling Mexican beer portfolio and cost advantages in procurement and advertising. The brewer has defied secular beer volume stagnation in the U.S., posting high-single-digit expansion annually in the past decade driven by a sharp focus on the attractive premium import beer segment and by smart ad campaigns that have broadened and reinforced the brand appeal of Corona and Modelo. We expect beer volume to remain solid for the brewer in the coming years, backed by a strong innovation pipeline, a loyal and well-engaged consumer base, and capacity expansion in Mexico.

We award a wide moat rating to Constellation Brands based on the strong brand equity and tight distributor relations that the company’s top-selling Mexican beer portfolio enjoys, as well as some scale-based cost advantages in procurement and advertising.

We plan to lower our $274 fair value estimate for wide-moat Constellation by a low-single-digit rate to account for a slower restoration of operating margin in the beer business. Specifically, with faster pricing action initially taken in fiscal 2023, slower price increases are set for deployment in 2024, despite still inflated input costs. In turn, this positions the beer segment for another year with a 38% operating margin, lower than the 39%-40% Constellation believes represents a reasonable long-term rate. We plan for a 39%-plus operating margin again in fiscal 2025, when transient inflation has pruned back, restoring a normalized cost structure. The beer segment remains a disproportionate contributor to valuation given it represents around 75% of sales.

While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage. After parlaying AB InBev’s antitrust quandary (allowing it to acquire Mexican brewer Grupo Modelo) into exclusive U.S. ownership rights to brands like Corona and Modelo, we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends. With an enviable growth profile and best of breed margins, we have confidence that the beer business can thrive even amid an evolving industry landscape.

We don’t plan to material alter our $267 fair value estimate for wide-moat Constellation Brands after digesting a less sanguine outlook for the firm’s fiscal 2023 second half, despite its second-quarter outperformance. In the quarter, Constellation delivered strong double-digit net sales growth of 12%, which resulted in $2.65 billion in revenue for the quarter, leaving the firm well positioned to hit our $9.2 billion full-year forecast. Constellation’s beer business prowess was evidenced in a 15% revenue lift and depletion growth of 9%. The standout, Modelo Especial, remained the number-one high-end beer and brand share gainer in the U.S. market and shared accolades with its Corona Extra and Pacifico peers as top-10 share gainers (per IRI). New product rollouts including Modelo Oro (light beer) and Corona’s nonalcoholic beverage feed into our optimism for continued product innovation, supporting our 6% average sales growth projection over the next five years.

While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage. After parlaying AB InBev’s antitrust quandary (allowing it to acquire Mexican brewer Grupo Modelo) into exclusive U.S. ownership rights to brands like Corona and Modelo, we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends. With an enviable growth profile and best of breed margins, we have confidence that the beer business can thrive even amid an evolving industry landscape.

We don’t expect any material change to our $269 per share fair value estimate for wide-moat Constellation Brands after dissecting its first-quarter performance, and view shares as attractive. Net sales spiked 17%, to $2.4 billion, tracking in line with our full-year sales forecast of $9.4 billion. Beer sales continued to be a driver of consistent revenue growth, resulting in a 21% uptick in segment sales, coupled with a sound average depletion rate of 8.7%. Modelo maintained segment leadership in the U.S. general and premium beer categories. The brand outshone competitors in brand share gains and posted 15% and 39% depletion growth for its Especial and Chelada labels, respectively. The wine and spirit segment also recorded a 2% net sales increase and received recognition for gains in category share, following the company’s divestment from select nonpremium products. Despite the strong sales, raw material, labor, and transportation inflationary pressures led beer’s operating margin to contract 260 basis points to 40.2% and the wine and spirits margin to slide 330 basis points to 19.6%.

While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage. After parlaying AB InBev’s antitrust quandary (allowing it to acquire Mexican brewer Grupo Modelo) into exclusive U.S. ownership rights to brands like Corona and Modelo, we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends. With an enviable growth profile and best of breed margins, we have confidence that the beer business can thrive even amid an evolving industry landscape.

We don’t plan any material change to our $262 fair value estimate for wide-moat Constellation after digesting its February-ended fiscal 2022 fourth-quarter results. Net sales rose 3% to $2.1 billion, bringing 2021 full-year sales to $8.8 billion, equaling our forecast. These results were bolstered by the strong performance of the beer business (75% of sales), which had depletion growth of 10%. The segment was again paced by Modelo, the top share gainer in the category, which had depletion growth of 15%. Although the beer business operating margin slid (down 110 basis points to 40%) due to inflation in commodity inputs, management was able to offset the hit partially with price hikes that were slightly above the typical 1%-2% (displaying the pricing power the brand has with its constituents).

While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage. After parlaying AB InBev’s antitrust quandary (allowing it to acquire Mexican brewer Grupo Modelo) into exclusive U.S. ownership rights to brands like Corona and Modelo, we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends. With an enviable growth profile and best of breed margins, we have confidence that the beer business can thrive even amid an evolving industry landscape.

We plan to raise our $258 fair value estimate for wide-moat Constellation Brands by a low-single-digit percentage after integrating its third-quarter performance into our model. Overall, results tracked in line with our full-year expectations as third-quarter sales of $2.3 billion place the company firmly on track to achieve our full-year sales estimate of $8.7 billion. Management increased its full-year EPS guidance to $10.50-$10.65 (from $10.15-$10.45), just modestly above our 2022 EPS estimate of $10.48. Constellation continued to see outperformance from core beer brands with depletion growth of 8% in the quarter. Modelo now holds the largest share of any brand in the high-end beer space after gaining the most share in the quarter. This underscores not only the strong customer base that already exists but also the continued growth opportunities for imports like Modelo and Corona with proper innovation. Despite persistent pressures from increasing labor and raw material costs, the impact on gross margins for beer (down 130 basis points to 41.3%) has partially been offset by price hikes slightly higher than the typical 1%-2%, which consumers have accepted.