Top Beer Brands and Innovation Drive Growth at Constellation

Constellation Brands STZ has earned a wide moat rating from us, thanks to the brand prowess and tight distributor relations afforded by its top-selling Mexican beer portfolio and cost advantages in procurement and advertising. The brewer has defied secular beer volume stagnation in the U.S., posting high-single-digit expansion annually in the past decade driven by a sharp focus on the attractive premium import beer segment and by smart ad campaigns that have broadened and reinforced the brand appeal of Corona and Modelo. We expect beer volume to remain solid for the brewer in the coming years, backed by a strong innovation pipeline, a loyal and well-engaged consumer base, and capacity expansion in Mexico.

We are maintaining our fair value estimate at $274, which implies a 25 times multiple against our adjusted 2024 earnings estimate and a 2024 enterprise value/adjusted EBITDA multiple of 17 times. We forecast 5.8% annual sales growth over the next 10 years driven entirely by the beer segment (80% of 2022 sales), alongside a 60-basis-point expansion in operating margin to 34.6% by the end of the 10-year period, relative to 2022. We attribute the widening margin to better leverage of advertising expenses (9.0% of sales by 2032 versus 9.4% in 2022) and more efficient selling and labor expense (9.8% of sales by 2032 versus 10.0% in 2022).

We view Constellation’s shares as attractive, currently trading at a 22% discount to our fair value estimate. While investor concerns about the firm’s investments in no-moat Canadian cannabis firm Canopy Growth have been an overhang on the stock, recent write-downs in this investment, coupled with a management declaration to not commit new capital to Canopy, lead us to believe further downside is under control. For investors looking to benefit from Constellation’s advantaged competitive position and long-term growth prospects, we see the current share price as offering a good entry point to build a position in this wide-moat name.