Summary
I am positive on Constellation Brands (NYSE:STZ). My summarized thesis is that STZ should continue to see healthy beer sales given its loyal customer base (Hispanic population). This should enable STZ to continue winning shelf space as its beer brands remain popular. As such, I don’t think STZ should continue to trade at the current forward P/E multiple of 17x, given the strong EPS growth outlook. In my base case, if multiples revert to the low end of STZ's historical trading range, the stock has a pretty attractive upside.
Company overview
STZ produces and sells beer, wine, and spirits in multiple countries (but most of the revenue is from the United States). Some of the featured brands of STZ are Modelo, Corona, Kim Crawford, and Casa Noble Tequila. Of all the alcohol product segments, STZ's main sales driver is the beer segment, which represented ~82% of FY24 revenue, whereas wines and spirits make up the remaining 18%.
Earnings results update
In the latest quarter (1Q25) reported yesterday, STZ grew total revenue by 5.8% to $2.661 billion, driven by beer sales of 8.3% and wine and spirits [W&S] sales decline of 6.6%. Beer sales were driven by strong shipment growth of 7.6% and a price/mix contribution of 0.7%. Importantly, beer depletion (from distributors to retailers) continued to grow positively, suggesting that underlying demand remains positive. As for W&S, sales declines were driven by a shipment decline of 5.1% and a negative price/mix contribution of 1.5%. Down the P&L, STZ also reported very strong gross margin performance, which expanded by 51 bps, mainly driven by the expansion seen in the Beer segment (gross margin improved by 102 bps to 53.4%), but was offset by the W&S gross margin decline of 321 bps to 43.4%. This led to 1Q25 adj EPS of $3.57, beating consensus estimates of $3.46.
STZ should continue to see volume growth
One of the broader concerns for STZ at the industry level is that US consumers are drinking less beer. However, I believe 1Q25 results have proven that STZ can continue to grow at a very healthy level. Firstly, STZ has a loyal base of consumers, where Hispanic consumers represent more than 50% of the total customer base (as per the 1Q25 earnings call). The buy rates from these consumers have continued to be strong and have outpaced the blended high-single-digit growth seen in 1Q25. Given that Hispanic populations accounted for the majority of overall growth in the US population, this is a demographic tailwind that should help STZ sustain growth ahead. STZ's years of cultivating its key beer brands to win the loyalty of this group of consumers have worked out, given that Modelo and Corona are the more popular Mexican beers in the US today.
Secondly, STZ's solid execution in capturing more shelf space this spring (as per the 4Q24 earnings call, STZ captured a low double-digit increase in shelf space) has well positioned itself to capture the step-up in demand during the summer season. Given the demand momentum and popularity of STZ key beer brands, I expect this “flywheel” effect of strong sales leading to more shelf space, which leads to more sales and shelf space, will continue for the foreseeable future. From the retailer perspective, they want to see higher turnover; as such, they are incentivized to have more stocks of the popular brands. Hence, I believe management will be able to execute on its medium-term plan (five years) to win more than 500,000 new points of distribution. The estimate is that this will contribute another 40 to 50% of volume growth, which should translate to an incremental volume of ~200 million shipments. Using the average net sales per case saw in FY24, this equates to around $3.9 billion of sales (or ~39% of FY24 sales). Spreading that over 5 years, it translates to around 8% of growth per year (a very healthy figure).
Marketing efficiency is an advantage
I believe one other advantage that STZ has over peers is that it has a very concentrated portfolio of just 5 brands, and this significantly improves marketing efficiency as resources can be allocated to make these 5 brands work. This contrasts with peers that have 10 to 20 times the brand, which means marketing resources are stretched. The results speak for themselves, as STZ holds the top two ranks in terms of popularity (in terms of Mexican beer).
Valuation
Looking ahead, management reaffirmed FY25 guidance, guiding for beer net sales growth of 7 to 9% and beer EBIT growth of 10 to 12%, implying an EBIT margin of around 39% at the midpoint, and consolidated EPS of $13.50 to $13.80, implying around 13% growth at the midpoint. I believe the EPS performance is easily achievable as 1Q25 already saw 17% EPS growth, and 1Q24 tends to be the 2nd weakest in terms of seasonality throughout the year (usually around a low 20%). If we annualize 1Q25 EPS, it equates to $14.27, which is above the high end of management guidance. With the underlying demand momentum, I am expecting EPS growth to sustain itself at the low-teens level in the near term as well.
Using the high end of FY25 EPS as the base and applying 13% growth for FY26, it equates to an adj. EPS of $16. As STZ shows the market that earnings growth can continue to trend at this level (it is not losing sales due to a broader industry trend), I don’t see a reason for valuation to continue trading at the current 17.7x (below the historical trading range of 19 to 23x). In the base case, if STZ reverts to 19x, the stock is worth $304, or 21% higher than today. In the bull case, STZ multiple could revert back to 21x, and the stock would be worth $336 (34% upside).
Investment Risk
While STZ beer sales remain strong, and I have reasons to believe they will be, there is no guarantee that consumer preference will not change. If Hispanic consumers decide to reduce beer consumption (following the ongoing trend for healthier F&B options), STZ will see a big hit as its products largely target this group of consumers. The fact that STZ only has 5 brands also makes it hard to pivot to other customer bases.
Conclusion
My positive view on STZ is because of the positive beer sales outlook. STZ has a loyal Hispanic customer base, and its successful brand positioning should continue to drive volume growth. Strong demand for STZ beers should incentivize retailers to stock up more STZ brands, which gives STZ a greater shelf space advantage (distribution advantage). With earnings expected to grow in the low teens, I believe the current valuation is attractive, especially considering STZ's historical trading range. The risk is a change in consumer preferences, which is hard to predict.