Beverage Industry: Tariffs Affect Imports and Packaging, but Policy Durability Uncertain

We are maintaining our fair value estimates for the beverage firms we cover following the US tariff announcements April 2. While tariffs for an extended period will pressure sales and margins, we think it’s possible that they could be rescinded as they tend to be used as a negotiating tactic. We see investment opportunities in Brown-Forman BF.B and Constellation Brands STZ, which trade at respective 36% and 34% discounts to our $52 and $274 fair value estimates.

For US-based alcoholic names, we see wide-moat Constellation, which generates 80% of its sales from Mexican beers, as remaining the most exposed to tariffs. While consumer products from Mexico are exempt in general, the US Commerce Department issued a separate notice on April 2 imposing a 25% import duty on canned beer, which makes up 39% of Constellation’s beer volume. We are not yet incorporating the tariffs into our base-case scenario, given the uncertainties, but our worst-case scenario suggests a high-teens impact on the bottom line if the tariff holds for the next four years.

Wide-moat Brown-Forman benefits from the exemption for tequila imports from Mexico (8% of sales). However, we expect that the 20% tariff on EU imports will likely bring retaliation from the trade bloc, which had threatened to impose a 50% tariff on US whiskeys. We don’t envision a disastrous outcome, though, given Brown-Forman’s low-teens sales exposure to the region.

For soft drink names, we see little direct tariff impact, given their localized supply chains. That said, we’d closely monitor cost inflation in packaging materials (notably aluminum) if the 54% tariff on Chinese products persists, as China accounts for 60% of the global aluminum supply. Energy drink makers Monster Beverage MNST and Celsius CELH are most exposed to aluminum cost hikes, as more than 90% of their volume is packaged in cans. However, we expect the firms to diversify sourcing and work with third-party co-packers to blunt the cost impact.