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Constellation Brands (STZ)

The last few months have initiated an unusual time for the alcohol industry in the United States and across the globe. On the one hand, you have had restaurants, bars, and clubs shut down and with it their largest avenue for beverage sales. While on the other you had people stuck in homes, unable to venture outside. Some bored from being on their own, some traumatized from dealing with children cooped up in a house 24/7 because they can’t go to school, and others stressed about losing working hours or their entire job, or from the potential destruction of civilisation as we know it. Who hasn’t needed a drink in the last few months? 

Past studies have shown that in times of economic and psychological stress consumers tend to spend less on alcohol for fear of having less money, but at the same time increase their alcohol consumption. So how does this work in reality? Well, they buy cheaper forms of alcohol. Gone are your expensive craft beer brands charging $10 a can. Instead, the focus shifts towards your mass-produced generic brands.

That’s where Constellation Brands comes in. They are the largest importer of beer into the US, with the third-largest market share. They have more than 100 brands in their portfolio, however, in the last few years, they have concentrated on selling their lesser-known wine and spirit brands in a bid to focus on their faster-growing premium brands. While no one could have predicted the pandemic, the move has left them in the perfect position for selling alcohol in the current environment. 

Ironically their most well-known brand is Corona and all of its variations – Extra, Light, Seltzer and Premier. Corona Extra has been the top-selling imported drink in the US since 1998. Their other big-name beer brand is another Mexican stablemate Modelo, while they also own the Pacifico beer label, along with wine brand Robert Mondavi, Svedka vodka, Casa Noble tequila, and High West Whiskey (a personal favourite) amongst many others. 

Both Corona and Modela are sold in the form of bottles and cans making it perfect for home consumption. This is exactly the type of beer that has seen an increase in sales over the lockdown period. In the week ending March 14, just as lockdowns were put in place, off-premise liquor outlets including grocery stores saw beer sales grow by 14%, wine sales by 27.6% and spirit sales by 26.4%. Online alcohol sales were up 42% year on year. 

According to Constellation Brands, sales for Corona, Modelo, and Pacifico, in the four weeks leading up to March 22 were up 24%, mostly through online purchases. CEO Bill Newlands stated, “During this time, we are focused on the channels the consumer is choosing, namely three-tier e-commerce, direct-to-consumer and the off-premise, especially big box, grocery and club channels, where we are working diligently to ensure high-end stock positions for our key SKUs,” Newlands said. “We’ve also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities.”

A rumour surrounding consumers being too scared to drink Corona were just that, rumours. The article was based on beer sales in China, which had decreased across the board for all beer companies – not Just Corona. Corona had actually fared better than most. Constellation Brands doesn’t have a financial stake in corona sold in China anyway, but it regardless created panic in the stock price. It managed to almost halve in price before investors came to their senses and the stock price bounced back strongly over the next few weeks. You can still get an 18% discount to what it was in the middle of February however. 

Constellations balance sheet is a strong one. It’s put the money it has made from selling its smaller known brands into paying off debt, with operating cash flow at a record of $2.6 billion and free cash flow at another record of $1.8 billion. It’s last quarter earnings, which finished on February 29 of this year, came in well ahead of expectations. Revenue was up 6% to $1.9 billion, while earnings per share were up 12% to $2.06.

The beverage company will use its big-name alcohol brands to continue to take market share while jettisoning its less popular and smaller margin products. The beer industry in the US is worth around $120 billion. However, we also like its 2017 move to take a 9.9% stake in Canopy Growth (WEED, CGC) becoming the first Fortune 500 company and first major alcoholic beverage make to take a stake in the marijuana business. 

Their ownership has since increased to 38%. And while creating headwinds initially it will be a great play to create future growth. You can read all about our views on the burgeoning cannabis industry here: https://capital19.com/category/investing-in-the-cannabis-industry/ 

We see Constellation Brands as a well run, financially secure business going forward. We feel the impact from covid19 has been exaggerated which will see the stock bounce back quicker than most. Even now the stock still trails the S&P500 in its remarkable recovery. It’s not too late to get a good price for a beaten-down stock. Any future price fluctuations will create solid buying opportunities. 

Cheers!

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