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Constellation Brands Inc Class A STZ

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Morningstar’s Analysis

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1-Star Price

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5-Star Price

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Economic Moat

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Capital Allocation

PREMIUM

Constellation’s Sterling Beer Business Offsets Lingering Wine/Spirits Headwinds in First Quarter

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.

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Company Profile

Business Description

Constellation Brands is the largest multi-category alcohol supplier in the U.S. The business is anchored by a portfolio of Mexican beer trademarks, including Corona and Modelo, for which it acquired exclusive and perpetual U.S. ownership from AB InBev. The latter had to divest these rights due to antitrust mandates as it consummated its 2013 acquisition of dominant Mexican brewer, Grupo Modelo. Constellation’s wine/spirits business is in transition, and it has divested several lower-margin assets, including myriad wine brands and its Ballast Point craft beer brand. The firm imports most products after manufacturing them abroad, going to market through independent wholesalers. It owns 38% of Canopy Growth, a leading provider of medicinal and recreational cannabis products.

Contact
207 High Point Drive, Building 100, Victor
New York, NY, 14564
T +1 585 678-7100
Sector Consumer Defensive
Industry Beverages - Wineries & Distilleries
Most Recent Earnings May 31, 2021
Fiscal Year End Feb 28, 2022
Stock Type Classic Growth
Employees 9,300

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