Constellation Brands

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading international producer and marketer of beer, wine, and spirits, with operations primarily in the U.S., Mexico, New Zealand, and Italy. Their portfolio includes high-end brands like Corona Extra, Modelo Especial, Robert Mondavi Winery, and High West whiskey.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Revenue Distribution: Constellation Brands operates through three main segments:
    • Beer: High-end imported beers, primarily Mexican brands like Modelo and Corona, is their largest and most important segment.
    • Wine and Spirits: Includes premium and luxury wine brands (such as Robert Mondavi and The Prisoner Wine Company), as well as high-end spirits (such as High West whiskey and Casa Noble Tequila).

  • Corporate Operations and Other: Includes corporate costs, expenses, and impacts from their investment in Canopy Growth.

  • Industry Trends:
    • The beverage alcohol industry has seen a shift towards premiumization, with consumers increasingly opting for higher-priced, better-quality products.
    • The beer market is becoming more competitive in the US, driven by new entrants and changes in consumer preferences.
    • The wine and spirits markets are less concentrated and highly fragmented.
    • There’s a growing trend for alcoholic beverages on digital channels and e-commerce.
  • Supply chain disruptions, while they have improved, are still something to monitor.

  • A shift towards new products like ready-to-drink cocktails.

  • Competitive Landscape:
    • Beer: Competition from other major international brewers like Anheuser-Busch InBev (AB InBev) and Molson Coors is high. In the US market they compete with domestic brewers like Boston Beer (maker of Samuel Adams), and craft breweries.
    • Wine & Spirits: A very fragmented landscape with competition coming from other large alcohol producers and numerous smaller brands.
  • Increasing levels of competition in the Mexican beer market.
  • What Makes STZ Different?
    • Their focus on high-end and imported brands, particularly Mexican beer, differentiates them from many other beverage companies.
    • The brand portfolio is mostly in high-margin high growth categories.
  • Their extensive distribution network and ability to build and promote brands. * Their investment in e-commerce, data analytics, and brand building.
  • Their Mexican beer brands, in particular, are very popular in the U.S.

Moat Analysis:

  • Rating: 3/5.

  • Justification: Constellation Brands has a narrow moat based primarily on its strong brand portfolio, especially in Mexican beer, and its distribution network.
    • Intangible Assets: The strength of the Corona and Modelo brands provides pricing power, and those brands have a strong loyal customer base. The brand strength is also important for maintaining market share and growing sales.
    • Distribution Network: Their distribution network is hard for other companies to replicate.
  • Scale and Cost Advantages: Their scale in manufacturing and distribution of Mexican beer allows them to benefit from economies of scale and to offer products at competitive prices, allowing them to capture a large portion of market share in the US market.

Risks to the Moat and Business Resilience:

  • Decreasing consumer brand perception: Although STZ has a strong brand power, consumer preferences can change. A shift away from their product lines or a loss in brand perception or brand recall could cause losses.
  • Increased Competition: Increased competition from larger international and local players may cause increased pressure on prices and market share. This can erode the pricing power from their brands and increase marketing expenditure.
  • Supply Chain Disruptions: As seen with recent supply chain issues, they are still a factor to consider for all types of businesses, and disruptions could create problems in product availability, quality, and price.
    • Regulatory Changes: Changes in government regulations relating to imports, pricing, or environmental laws could significantly impact operations, and profitability. For example, an increase in taxes on imported Mexican beer can negatively affect operations.
    • Dependence on Mexican Beer Brands: Their reliance on Mexican beers makes them highly vulnerable to price changes in that market, along with an increasing competition in the Mexican beer market, as many competitors look to create cheaper imitations of their brands.
    • Reliance on Distributors: The company depends on third-party distributors for its product distribution. They may encounter disruptions in their supply chain through their partners. Loss of a key distributor can significantly affect their operations.
  • Changes in consumer preferences: As seen in the case of Bud Light, consumer preferences can drastically change, and companies must be on their toes to keep up with trends. A preference towards different alcoholic beverages and new substitutes may affect the demand for their products.
  • Dependence on Imports: In addition to risks associated with price fluctuations, there are also risks related to trade policies and import restrictions. Trade policy changes or tariffs could have a material effect on their operations.
  • Tax Law Changes: Significant tax law changes in their operating geographies could change the profitability of their operations by changing their tax structure.

  • Acquisition Failure: Future acquisitions might not perform as expected. Failure to realize their value could be harmful for the company’s performance.

  • Business Resilience: The company has consistently grown its sales and profitability, thus giving it some stability during downturns. The company also owns intangible assets such as brand names which are more resilient and able to bounce back during tough times. They also have a good understanding of supply chain and distribution, allowing them to avoid some vulnerabilities. However, they do operate in a high leveraged industry, so the ability to maintain their high returns on invested capital for long term is not ensured.

Financial Analysis:

  • Revenues: The company has consistently grown revenues for the past 5 years. For the 9-month period ending November 30, 2024, their revenues were $8,419 million and they are up 3.9% year-over-year.
  • Gross Margin: Gross margins were at 52.1% for their most recent quarter, down from 51.8% year-over-year.
  • Net Income: In the most recent 9 months they have generated a net loss attributable to CBI of $1,125.8 million, as compared to a net profit of $1,335 million in 2023. This is largely due to an impairment in their Equity Method Investment.
  • Debt: They carry a large amount of debt, which is often a concern with leveraged companies. Their debt/equity ratio is 1.69. They are also reliant on short-term borrowings for maintaining their financial needs and operations. For the last 9 months, their interest expense increased by $56 million.

  • Return on Invested Capital (ROIC): Their ROIC has fluctuated over the years from 2004 to 2008, as shown on page 70 of the “Valuation: Measuring and Managing the Value of Companies”. For the most recent quarter, its ROIC has declined to 11.9%, as it was 17% in 2023. However, their 10-year average for ROIC is about 18%, which is an attractive figure for an established business.

  • Management’s View and Recent Controversies:
    • During the last earnings call, the management highlighted their goal of returning to top line growth and growing margins for their long-term financial health.
    • The company also said they plan to continue investment in their Mexican Beer portfolio, along with their high end wine and spirit brands, in order to achieve future growth.
  • Management is working on streamlining and optimizing operations through their “multi-year digital business acceleration” strategy to improve margins.
  • The management has been continuously involved in acquisition and divestiture activities in an effort to optimize its brand portfolio.
  • They also plan on utilizing excess cash to prioritize capital deployment, while being flexible with share repurchases.
    • Management says they are working on their debt profile to reduce its cost.
    • Management is working on streamlining their supply chain and has also been taking steps to create more sustainable packaging.

Understandability Rating:

  • Rating: 2 / 5
    • The business itself is easily understandable, as it has 3 main segments (Beer, Wine, and Spirits), but how these segments work and what contributes to their success is relatively complex. Understanding the dynamics and relationships between these segments and their financials takes some effort.
    • The accounting practices of the company are also complex as they are involved in multiple acquisitions and divestitures, and also have several international operations, making understanding their financial statements challenging.
    • Also, various metrics related to alcoholic beverages, like sales volume, depletion rate, shipment volume, and more, can be initially confusing.

Balance Sheet Health Rating:

  • Rating: 3 / 5
    • While the company has a large amount of assets, they are highly leveraged, as they rely on both short and long-term debt to finance their operations.
    • Their interest expenses are a significant part of their expenses.
    • However, their revenue and cash flow are consistent and growing, which provides some assurance regarding their ability to meet their financial obligations.

In conclusion, Constellation Brands is a company with a narrow moat stemming from its valuable brand recognition and efficient distribution network. Their business is easy to understand on the surface, though the financials are a bit complex. They are highly leveraged, which is a major weakness in their business. They are fairly resilient in tough economic times due to the nature of their product and high brand power. They have plans for reducing debt, and increasing profitability by streamlining operations and investing in growth sectors. They also need to keep their operating costs stable and control for unexpected industry wide problems.