Can Constellation Brands Bounce Back From Its Worst Stretch in Years?

SPEAKER_1 (0:00)

We're back on Morning Trade Live, and we're looking at a couple of alcoholic beverage stocks this morning. We are trading higher on all four of these names right now. Viagio is up 1.3. Constellation Brands, which of course is the focus, given its earnings out later, just up fractionally going into this print, Molson Cause is the winner on the day, up over 2% right now. But as we know, some of these brands have been having a pretty tough time lately, dealing with a shift in consumption trends. So let's go inside out on Constellation Brands ahead of its earnings report this afternoon. Joining us to do that is Kevin Mahn, who's the president and CIO Henion Walsh Asset Management. Kevin, always nice of you to join us. Thank you so much for your time. So what do these guys got to say tonight? I guess it all comes down to how much booze everyone's drinking right now.

Kevin Mahn (0:45)

Well said, Sam. And there are two constellations in the headlines today. Of course, first and foremost, Constellation Energy, which just signed that 20-year contract with Google, to supply them with nuclear energy for their own AI ambition needs. But then there's Constellation Brands, which reports earnings today. And to put this all into perspective, Constellation is facing multiple headwinds, but those headwinds are primarily industry-related, changing demographics in terms of what consumers prefer as it relates to liquor. Now, I think a large part of that has been overplayed. Consider this, according to Forbes, global total average alcohol consumption is only down 2 percent, across the globe down 4 percent on a value basis. And most of those traumatic changes in consumption aren't felt across the globe. Particularly, it's impacting North American markets and European markets, but developing markets in areas such as India, Mexico, Brazil, they're actually seeing volume expansion. And I think Constellation is well positioned to take advantage of those geographic demographics and also the change in consumption behavior, because they also have several non-alcoholic products in their lineup.

SPEAKER_1 (2:06)

Right. I wanted to ask about that because if it is industry related and it is geographically specific to which market that you are obviously catering to, then who is doing the best? And what's Constellation Brands doing to try to address some of that?

Kevin Mahn (2:21)

Yes. Obviously, they come out with multiple new products. Some are zero alcohol, some are lower in alcohol. Modelo and Corona continue to be at the top of the leaderboard as it relates to beer sales. Beer sales are pulling back, but that's not necessarily true. Once again, across all markets are all across all age demographics. So they're trying to solve for both some of those changing investor demographics, but also leaning in to what they do best. And that's their leading branch, which again are Corona and Modelo. So I'm going to be paying very close attention to what they report as it relates to beer sales, what they relate to beer sales, both alcoholic and non-alcoholic, and also how they're controlling costs. Of course, diesel costs are higher. We know there's a trucker shortage. All of that impacts Constellation's bottom line. But if they can help better manage those underlying costs and provide positive forward-looking guidance, well, guess what? This stock is trading at less than 10 times forward earnings right now, and they got a dividend yield of about 3.6 percent. So there's a lot to like about the stock and the company's balance sheet, but they need to show that they can control costs and that this decline in total volume across the globe. But again, it's only just 2 percent on an average basis, is it impacting them more than their competitors?

SPEAKER_1 (3:45)

Yeah, I'm glad you mentioned the valuation because it's trading at its lowest multiples in over 14 years. But this has obviously been, as you mentioned, an industry wide issue. But I was just looking at the stock as far as the more recent performance. I mean, it's been pretty punishing, Kevin. I mean, September alone was roughly down 13 percent. I mean, 52-week low as of yesterday, I see as well at 111, as it was picked up now 113 and change. But what do you think it's going to take to turn this one around? You can see it on the chart here.

Kevin Mahn (4:19)

Yeah. I mean, the stock is down 16 percent year to date, over 20 percent over the last three years. I just wonder if the worst is already priced into the stock right now.

And if in fact, we see them beat on earnings, last estimate I saw was about 362 per share, revenue estimate nearly 2.6 billion. If they could beat on both earnings and revenue and provide forward-looking guidance given how much their stock has pulled back, given their current valuation and given the strength of their balance sheet, you could see a bounce here. But I still think there's too many headwinds facing the overall industry right now to really allocate too much capital to this area.