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HomeMarketBeer Demand Is Tapping Out, but Constellation Brands May Serve Strong Earnings

Beer Demand Is Tapping Out, but Constellation Brands May Serve Strong Earnings

An analyst predicts Constellation’s Modelo sales could reach some $6.1 billion by fiscal 2028, a 10.4% compound annual growth rate.

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With Christmas just around the corner many people are filled with holiday cheer—singular cheer that is, not the hearty cheers of holiday toasts, judging by what’s going on in the beer market.

Yet that doesn’t mean investors should underestimate
Constellation Brands
‘ (ticker: STZ) upcoming earnings.

As a refresher, it’s been a cold December for beer data.

At the start of the December, Wells Fargo analyst Chris Carey noted that Mexican beer imports declined for the first time in 20 months in October, falling 1.1%. Also at that time, the CEO of Constellation rival
Molson Coors Beverage
(TAP) at a broker conference noted that October was a difficult month.

A week later, Credit Suisse’s Kaumil Gajrawala did his own math, looking to see if higher beer prices, which have pushed up total sales overall, were masking lackluster demand. Indeed, he found that beer velocity, or sales per point of distribution, were up 14% on a dollar basis when compared with the prepandemic period of 2019, but only 1% higher when measured by units.

In other words, inflation-fueled price increases were bolstering revenue even as the number of brews sold were only inching higher.

At the same time, Goldman Sachs’ Bonnie Herzog scrutinized the latest reading from Nielsen, which found that beer sales for the two weeks ending Dec. 3 were up more than 5%, although that was driven by a nearly 8% gain in pricing, offsetting a low-single-digit decline in volumes.

Yet Herzog is out with a positive preview of Constellation’s earnings on Tuesday, and reiterated a Buy rating on the stock with a $273 price target—one of her top picks—ahead of the report, slated for Jan. 6.

She notes that scanner data and management’s own commentary about ongoing pressure for operating margins are less than ideal, but those factors have largely already been baked into the shares, as they are off more than 11% in recent weeks.

In fact, Herzog believes that “results will be better than feared despite the recent slowdown of the beer category,” and that longer-term its brands still look strong. She’s predicting Modelo sales could reach some $6.1 billion by fiscal 2028, which represents a 10.4% compound annual growth rate, and notes that the company has significantly reduced the number of out-of-stock products, an issue that has plagued many players in the industry.

She also sees the valuation as compelling, given that Constellation stock is trading at a high single-digit discount to its alcohol peers. Changing hands at 18.7 times forward earnings, the stock is also below its own five-year average of 20.6 times.

For his part, Credit Suisse’s Gajrawala noted that his analysis showed that “Constellation looks to be in the best shape,” among the companies he covers, followed by
Anheuser Busch InBev
(BUD) and then Molson Coors. He found Constellation’s Corona, Modelo, and Pacifico velocities were all ahead of 2019 levels, although he did warn that trends are plateauing: “It is too early to tell if a prolonged slowing will occur but given +6% volume expectations fiscal 2024, this is something we will be watching.” He rates Constellation stock at Outperform with a $273 price target.

Likewise, Wells Fargo’s Carey reiterated an Overweight rating and $280 price target on Constellation stock in his otherwise measured report earlier this month. Carey still sees it as the “best growth at a reasonable price play in our coverage.”

They aren’t alone: All but five of the 26 analysts tracked by FactSet are bullish on Constellation stock, with the remainder sidelined, but not bearish. The average analyst price target is $276, 30% ahead of where the stock stands today.

Constellation’s earnings per share have surprised on the upside the past four quarters, despite the drag of the company’s cannabis business. If nothing else, its new share-class structure gives average stockholders more say.

So its upcoming quarter may not be a slam dunk, but investors don’t have to sign up for a dry January just yet.

Write to Teresa Rivas at teresa.rivas@barrons.com

Credit: marketwatch.com

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