Constellation Brands Might Have A Corona Problem, Analyst Says

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Constellation Brands stock has surged ahead of the market in 2019, despite ongoing headwinds for big beer. However, Macquarie argues that the maker of Corona and Modelo brews still faces sobering challenges in the long run—and that’s without tariffs.

The back story. Constellation stock (ticker: STZ) is up nearly 15% year to date, ahead of the broader market’s gain, although it’s still working off a loss of almost 18% over the trailing-12-months period. Constellation had a tough 2018, due to disappointing beer trends, the increased use of cannabis (which reduces alcohol demand) and other factors, and had a difficult start to the year, when its outlook disappointed in January. However, analysts have since become more optimistic about the stock, many are excited about its investment in marijuana and potential sale of its wine business. Constellation’s most recent earnings report showed encouraging signs for its beer business (which we’ve seen for peers as well). Still, it wasn’t spared May’s market carnage, and Mexico tariffs would be bad news for Constellation.

What’s new. On Wednesday, Macquarie analyst Caroline Levy reiterated a Neutral rating and $220 price target on Constellation stock, following her conversation with a pair of beer experts—the founder of Beer Business Daily and CEO of the BWC Company. She notes that they’re bearish on Constellation—but not because of the potential tariff threat. They believe that while the Modelo brands is still going strong Corona “has lost its mojo” while facing difficult comparisons, and its Refresca beer “is likely a Hispanic-niche product.”

Looking ahead. Alcohol producers such as Constellation and its peers are experimenting with a number of options to counteract the pressures on big beer. Recent earnings have shown a bit of hope, but Levy and her “beer gurus” are concerned about Constellation’s plans for Corona, including introducing a cheaper canned version of the famous clear-bottled brew. The lower price point may drive sales at first, but “may be a short-sighted move” given that “Corona’s brand was built around a clear bottle with a lime whereas the can format is arguably more commoditized.” There are other concerns as well, she notes, including the company’s decision to emphasis on distribution over displays (as the later can play a key role at the liquor store).

Still, Levy notes that these are longer-term issues and it looks like the company can achieve its 7% to 9% revenue growth forecast in fiscal 2020.

Moreover, as noted above, there has been some hope on the beer-volume front, although that will continue to be challenged due to smaller, craft competitors and the legalization of marijuana. Still, if Constellation can harness the increasing popularity and availability of the latter, that could help to boost the company’s growth even as other parts of the portfolio lag.

Constellation is down 1.1% to $186.51 in recent trading, while the S&P 500 and the Dow Jones Industrial Average have gained 0.6%.

By Teresa Rivas
June 5, 2019
Source: Barrons.com