Analyst Note| Nicholas Johnson, CFA |
The backdrop heading into wide-moat Constellation Brands’ fiscal first-quarter earnings print was quite pedestrian--the stock traded sideways in recent months--and we suspect investors were mostly looking for visibility into recent innovation as well as how margins held up amid industrywide cost inflation. Despite mixed evidence on both, the results were solid from our perspective—sales beat and earnings missed relative to FactSet consensus, but there was a slew of exogenous factors that hit earnings. We plan to raise our $250 fair value estimate modestly to reflect time value and beer top-line momentum, partly offset by higher taxes as we incorporate Morningstar’s probability-weighted house view of a 26% U.S. statutory rate. Investors should note that the tax structure of the beer business—Constellation’s cash cow—sits in Switzerland. While we’re not tax mavens, based on the formidable hurdles and uncertainty surrounding the implementation and enforcement of a global minimum tax, we don’t currently foresee the tax profile of the beer operation being fundamentally altered. The shares strike us as fairly valued, but we’d remain avid buyers on any pullback.