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USA: Constellation Brands shares down as company awaits fateful decision on import tariffs
Few major U.S. corporations would be as clearly affected by tariffs on Mexico as Constellation Brands, which sells the imported Modelo, Corona and Pacifico beer brands in the U.S., MSN reported on January 1.
No wonder its shares are down about 8% this year compared with a nearly 25% rise for the broader market.
It is tempting to think then that the stock could be in for quite a bounce if President-elect Donald Trump doesn’t ultimately make good on his threat of 25% tariffs for Mexico and Canada. But the shares still aren’t cheap enough to justify what is a huge risk.
After all, the Mexican brands that make up Constellation’s beer business accounted for 82% of the company’s net sales in its fiscal year ended in February 2024. They were also its growth driver, rising 9%, compared with a 9% decline in wine and spirits sales.
Even absent tariffs, Constellation has problems that justify at least some of its share-price decline. Namely, weak U.S. beer consumption in general. Rival brewers Molson Coors and Anheuser-Busch InBev are down about 6% and 22% over the same period, respectively.
Most important, Constellation’s own beer sales have been slowing. Depletions—an industry measure monitored by analysts that refers to sales by distributors to retailers—rose just 2.4% from a year earlier in the quarter through August.
For the quarter ended in November, which Constellation reports in January, analysts expect depletion growth to rebound to 4.2%, according to Visible Alpha’s consensus estimates. But that is still down from 7.5% in Constellation’s prior two fiscal years.
The company has attributed this slowdown to “macroeconomic headwinds” such as inflation. It says conditions are now improving.
Against this backdrop, a 25% tariff would hit extremely hard, making what are already premium beers much less affordable, especially relative to domestic brands.
Asked about the tariff threat at a Morgan Stanley investor conference on Dec. 4, Constellation finance chief Garth Hankinson pointed to possible offsets including cost cuts and price increases. He said that any price hikes would have to be balanced against the impact on demand.
Hankinson also made a political case for the imported beer business, saying it helps American distributors and retailers. He also argued that tariffs would hurt U.S. farmers who provide inputs for the beer, which “cross the border into Mexico for conversion into finished goods and then cross the border back for U.S. consumption.”
Arguments like that seem unlikely to make a large dent in the Trump administration’s enthusiasm for tariffs.
Meanwhile, Constellation’s stock is trading at roughly 15 times forward earnings, according to FactSet. That compares with a five-year average of 19.6 times. But AB InBev and Molson Coors are also trading at discounts to their historic averages. And they are even cheaper at 13.9 and 9.7 times forward earnings, respectively.
The risk is that Constellation’s multiple converges not with its historic average, but with those of its rivals. In that case, its stock isn’t that much of a bargain.
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