Analyst Note| Jaime M. Katz |
We plan to lower our $274 fair value estimate for wide-moat Constellation by a low-single-digit rate to account for a slower restoration of operating margin in the beer business. Specifically, with faster pricing action initially taken in fiscal 2023, slower price increases are set for deployment in 2024, despite still inflated input costs. In turn, this positions the beer segment for another year with a 38% operating margin, lower than the 39%-40% Constellation believes represents a reasonable long-term rate. We plan for a 39%-plus operating margin again in fiscal 2025, when transient inflation has pruned back, restoring a normalized cost structure. The beer segment remains a disproportionate contributor to valuation given it represents around 75% of sales.