Constellation Earnings: Share Gains Persist as Consumers Find Favor With Premium Beer Segment

Despite continued inflationary pressure, wide-moat Constellation Brands STZ 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.

Although industry pricing dynamics remain uncertain, we believe Constellation’s brand is intact, evidenced by stout demand for its beer portfolio in the quarter and a $60 million sales boost from pricing initiatives. Beer sales popped 11%, trending in line with our 9% estimate for fiscal 2024. Constellation’s offerings continued to resonate with consumers and outpaced the entire beer category in dollar sales and volume gains. In fact, Modelo Especial was crowned the number-one beer in dollar sales, delivering impressive share gains. We believe the firm is well equipped to adequately meet future demand, thanks to unearthed efficiencies and capital investments to boost capacity.

Cost savings in the beer segment (to the tune of $30 million) helped minimize the blow from a 4% bump in input costs and a 17% increase in marketing expenses, which reduced operating margin by 220 basis points to 38%, in line with our full-year estimate. We still anticipate marketing expenses to fall to around 10% of sales from 11% in fiscal 2023 as the increase in spending was attributable to the launch of Modelo Oro.

Despite the strong performance in beer (80% of sales), management reiterated its fiscal 2024 outlook for $11.70-$12.00 in EPS and 7%-9% in beer sales growth. While our 9% beer sales growth forecast should hold, we anticipate moving our $11.35 EPS closer to the guided range to account for greater-than-anticipated share repurchases.