Constellation Brands put up such disappointing quarterly results before Friday’s opening bell that we’re having second thoughts about whether the beer, wine and spirits stock still belongs in the portfolio. Net sales for the three months ended Nov. 30 were largely flat year over year, coming in at $2.46 billion, missing the $2.53 billion expected, according to analysts’ estimates compiled by LSEG. Adjusted earnings per share (EPS) of $3.25 in the company’s fiscal 2025 third quarter were a penny shy of last year and missed estimates of $3.31, LSEG data showed. Constellation Brands Why we own it : Constellation Brands’ beer franchise, which includes popular Mexican brands Modelo, Corona and Pacifico, is the growth engine and by far the most attractive part of the business. We continue to urge Constellation to concentrate on beer and divest its struggling wine-and-spirits unit. Competitors : Anheuser-Busch Inbev and Molson Coors Weight in Club portfolio : 2.34% Most recent buy : Dec. 31, 2024 Initiated: May 5, 2022 Bottom line This was not the quarter we were looking for — and unfortunately, we see little reason to defend Constellation as we now think that management’s previous optimism was misplaced — and they are only now taking a realistic view of the demand environment. We knew wine and spirits were struggling, but these numbers showed cracks in the company’s venerable Mexican beer franchise, which includes the Modelo and Corona brands. Whether it’s the impact of GLP-1 weight loss drugs, a preference from younger consumers for cannabis-based alternatives — or a combination of the two — it’s becoming clear the alcohol industry overall isn’t showing the growth we had expected. STZ 1Y mountain Constellation Brands 1 year When a stock is down double digits and you’re not itching to buy it, that’s usually a sign that it may be time to bail. In addition to the GLP-1 and cannabis concerns, there is added uncertainty from the expected policies of the incoming presidential administration of Donald Trump regarding immigration reform and trade tariffs. The fact that inflation-weary consumers’ pockets are also hurting is another factor. While Constellation has been known to weather all kinds of economic and political climates, the enormity of challenges lining up against the stock is evident in its more than 16% single-session decline at one stage during Friday trading near $180. Earlier on Friday, we downgraded Constellation shares to our 3 rating, meaning that we will look to sell into strength down the line, and we put our price target under review. We can now say we’re cutting our price target to $240 per share from $300. However, we may look to exit the position before seeing that level. Beyond the headline numbers, there really isn’t much in the quarter or the outlook to grasp on to for the bulls. Free cash flow slightly outpaced expectations but every other quarterly line item of importance came up short. The same dynamic goes for management’s guidance for the remainder of the fiscal year. The team upwardly revised its full-year outlook for free cash flow but downwardly revised forecasts for sales and operating at both the companywide level as well as for both operating segments. While Constellation can unlock value by separating out its wine and spirits business — and management has taken steps to divest and focus on their premium brands — we don’t think it enough to justify sticking with the name long-term now that it seems beer demand is also weakening. Commentary Sales in Constellation’s wine-and-spirits division fell 14% on an annual basis to $431.4 million for the quarter, missing estimates of $483 million, according to FactSet consensus. Operating income of $95 million also missed expectations, falling over 25% versus the year-ago period as the segment’s operating margin contracted by over 330 basis points year over year. Shipment volumes fell 16.4%, while depletions — which measures the number of cases sold to retailers by a distributor — declined 4.3% compared with the year-ago period, missing the Bloomberg compiled estimate for 5.5% year-over-year decline. The beer segment did show quarterly sales and operating income growth, however, not to the level the Street was looking for and certainly not enough to offset the weakness in wine and spirits. Sales increased 3% year over year to $2.03 billion, missing expectations. Operating income ticked up 1.7% year over year but also came up short as the segment’s operating margin contracted 59 basis points. Shipment volumes increased 1.6%, while depletions growth came in at 3.2% versus the year-ago period, short versus the Bloomberg compiled estimate for 4.3% year-over-year increase. Management highlighted that the company’s beer business was once again the No. 1 dollar-share gainer in the category “with six of the top 15 dollar-share gaining brands in Circana channels across the entire U.S. beer category.” Circana is a market research provider. Guidance Constellation’s fiscal 2025 guidance was revised as follows: Management reduced the lower end of its full-year adjusted EPS outlook, now targeting a range of $13.40 to $13.80, down from the previous range of $13.60 to $13.80. Companywide net sales are now expected to increase 2% to 5% versus fiscal year 2024, down from the prior projection for 4% to 6% year-over-year growth. Driving that new top-line outlook, wine and spirits net sales are expected to be down 5% to 8%, organically, down from the prior forecast for a 4% to 6% decline. The beer unit is now projected to see net sales growth of 4% to 7%, down from the previously forecasted 6% to 8% range. Adjusted operating income is expected to grow between 6% and 9%, down from the prior range of 8% to 9% year over year. Beer segment operating income is now expected to increase 9% to 12%. Wine and spirits operating income is expected to decline between 17% and 19%, down from prior ranges of up 8% to 9% and down 16% to 18%, respectively. Full-year free cash flow guidance was the sole bright spot, with management now expecting the year to land in the range of $1.6 billion to $1.8 billion, up from a range of $1.4 billion to $1.5 billion previously. (Jim Cramer’s Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Cases of beer from Corona and Modelo on display at a BevMo store in San Rafael, California, on Jan. 5, 2024.
Justin Sullivan | Getty Images
Constellation Brands put up such disappointing quarterly results before Friday’s opening bell that we’re having second thoughts about whether the beer, wine and spirits stock still belongs in the portfolio.