Constellation Earnings: Frugal Consumer Trends Weigh on Alcoholic Beverage Performance

Shares of wide-moat Constellation Brands plunged over 17% after its weaker-than-expected fiscal third-quarter results, driven by frugal consumers scaling back alcoholic beverage spending. As a result, revenue remained flat at $2.5 billion, buoyed by a slowing 3% increase in beer sales (82% of sales). Challenges in the wine and spirits portfolio persisted, with sales dipping 14% during the quarter. Meanwhile, adjusted earnings per share remained unchanged from the prior year as cost efficiencies offset rising marketing investments. Ultimately, management lowered its full-year outlook for net sales growth to 2%-5% from 4%-6% and for adjusted EPS to $13.40-$13.80 from $13.60-$13.80. After nudging down our 6% and $13.76 respective estimates, we plan on reducing our $291 fair value estimate by a mid-single-digit percentage, leaving shares undervalued. We think our 10-year forecasts for 6% sales growth and 32% operating margin remain within reach, thus the moderate fair value change relative to share price movement. We remain constructive on the firm’s long-term outlook, given the strong brand equity of its Mexican beers and premiumization tailwinds.