Beverage Distribution And Veracruz Production Will Ensure Future Stability

Key Takeaways

• Strategic brand divestitures in Wine & Spirits and disciplined beer business innovations aim to boost margins and future revenue growth.
  
• Strong cash flow projections support expansion and share repurchases, enhancing shareholder value and potentially driving profit and revenue growth.
  
• Economic challenges and tariffs could hinder revenue growth and profitability, with risks in the beer segment, wine divestiture, and reliance on consumer confidence.

Catalysts

Produces, imports, markets, and sells beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy.

• Constellation Brands expects the nonstructural socioeconomic factors affecting consumer demand to stabilize, and plans to drive distribution gains, launch disciplined innovations, and deploy incremental marketing investments to support beer business growth, which could positively impact future revenues.
  
• The anticipated restructuring and divestitures within the Wine & Spirits business, including the sale of mainstream wine brands, are expected to yield over $200 million in net annualized cost savings by fiscal '28, potentially enhancing net margins and earnings.
  
• The target of delivering approximately $9 billion in operating cash flow and $6 billion in free cash flow from fiscal '26 to '28 supports continued investments in expanding production capacity, such as the development of a new brewery in Veracruz, which could drive revenue and profit growth.
  
• With a strong cash flow projection, Constellation Brands plans to execute share repurchases valued at up to $4 billion over three years, which could improve earnings per share and signal confidence in the company's valuation.
  
• Brand health metrics remain strong, with gains in awareness for top brands like Modelo, Corona, and Pacifico, supported by increased media investments. This positioning and customer loyalty could lead to sustained sales growth and improved revenue.

Constellation Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Constellation Brands compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Constellation Brands's revenue will grow by 6.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.7% today to 24.2% in 3 years time.
• The bullish analysts expect earnings to reach $2.9 billion (and earnings per share of $18.47) by about April 2028, up from $686.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, down from 48.3x today. This future PE is lower than the current PE for the US Beverage industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Constellation Brands Future Earnings Per Share Growth

Risks

• The projected net sales growth rate for Constellation Brands' beer segment is relatively modest, with expectations of only 0% to 3% for fiscal '26 and 2% to 4% for fiscal '27 and '28, which could hinder revenue growth over the coming years.
  
• The anticipated impact of tariffs, particularly on their wine and spirits business and aluminum cans, is expected to affect operating margins, increasing costs and potentially decreasing profitability.
  
• The socioeconomic issues affecting the Hispanic consumer, a critical demographic for Constellation's beer brands, could persist longer than anticipated, impacting consumer demand and ultimately affecting revenue growth.
  
• The wine divestiture is expected to result in the sale of remaining mainstream wine brands, which could reduce revenue from the wine segment until the restructuring and cost savings are fully realized by fiscal '28.
  
• The company's dependence on improvements in consumer sentiment and spending behavior presents a risk; prolonged economic distress or decreased consumer confidence could impact their earnings and longer-term growth projections.

Valuation

• The assumed bullish price target for Constellation Brands is $264.05, which represents one standard deviation above the consensus price target of $226.56. This valuation is based on what can be assumed as the expectations of Constellation Brands's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $165.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $12.2 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $183.4, the bullish analyst price target of $264.05 is 30.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.