Resilient Beer Demand Buoys Growth Outlook for Constellation

We don’t plan to materially change our $274 fair value estimate for wide-moat Constellation Brands STZ, after absorbing the brewer’s solid fiscal 2023 (ended in February) full-year results that included revenue of $9.5 billion and adjusted EPS of $10.65 (excluding impairments in the Canopy investment), which are both within a stone’s throw from our estimates ($9.5 billion and $10.74 billion, respectively). Our 10-year forecast for mid-single-digit sales growth and operating margins averaging 33% remain in place. Current share price implies an 18% discount, which we view as offering a good entry point for long-term investors.

Our confidence in the brewer’s long-term competitive position was reinforced by strong beer sales in fiscal 2023 (11% growth), thanks to the brand prowess of top-selling Corona and Modelo (source of the firm’s intangible asset moat) in the premium import beer segment. The brands’ consumer-centric innovation in categories such as chelada and nonalcoholic beer, in addition to new flavors (such as lemon and watermelon) and variety packs of beer, should help fortify their value proposition among existing consumers and expand the reach to recruit and retain new drinkers. These, coupled with Constellation’s steady progress in adding distribution beyond its strongholds of California and Texas, give us confidence that our 6%-7% annual beer revenue growth forecast over the next 10 years (5% volume depletion, 1%-2% pricing) remains achievable. For its lackluster wine and spirits portfolio (21% of 2023 sales but only 14% of operating profits), we expect revenue to remain flat at best in the coming years, as organic sales growth (primarily from omnichannel sales gains internationally) barely offset continued pruning efforts.