Is Constellation Brands Set for a Rebound After Canada Cuts US Alcohol Imports?

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If you have been watching Constellation Brands lately and wondering if it is time to buy, hold, or steer clear, you are not alone. The stock just closed at $163.68, but its journey here has been anything but smooth. Stepping back, the numbers paint a sobering picture: the stock is down 1.3% over the last week, has slid 6.7% in the past month, and has dropped a hefty 26.5% year-to-date. In fact, expanding the view to the past year or even the past three years, the declines deepen to over 30%. Over five years, the share price is still down, though less steeply, by 4.8%.

What is behind this rocky performance? Recent headlines provide some clues. Canadian buyers have pulled back from U.S. alcohol imports in response to trade tensions, causing demand to drop. Additionally, Americans are drinking less than ever, with a Gallup survey showing record-low alcohol consumption. Even though major industry players like Constellation are exploring new spaces, such as cannabis-infused beverages, the immediate impacts of these market shifts have clearly affected the stock and may have influenced investor sentiment.

Here is where it gets interesting. While those price drops may make some investors nervous, they also raise a critical question: is Constellation Brands now undervalued, or is there more pain ahead? On a purely numerical basis, the company scores a 3 out of 6 on our key valuation checks, indicating it looks undervalued on half of our criteria. Next, let us break down what those valuation checks actually tell us. There is also a sharper perspective on value that you will want to see by the end of this article.

Why Constellation Brands is lagging behind its peers

Approach 1: Constellation Brands Cash Flows

The Discounted Cash Flow (DCF) model is a popular tool investors use to estimate a company's true value by projecting its future cash flows and discounting them back to today’s dollars. In simple terms, it tries to answer the question: What are all future cash flows of the business worth right now?

For Constellation Brands, the latest twelve months’ free cash flow stands at $1.91 billion. Analysts have forecast steady growth, with projected free cash flows reaching $2.78 billion by 2030. It is important to note that while analyst coverage provides estimates for the next few years, projections beyond five years rely on extrapolation rather than analyst consensus.

Based on this model, Constellation Brands’ estimated intrinsic value comes in at $365.62 per share. With the current share price around $163.68, the DCF model indicates the stock is trading at a significant 55.2% discount to its calculated fair value. In other words, the market is valuing Constellation Brands noticeably below what its future cash flows suggest it may be worth.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Constellation Brands.

Our DCF analysis suggests Constellation Brands is undervalued by 55.2%. Track this in your watchlist or portfolio, or discover more undervalued stocks based on DCF analysis.

Approach 2: Constellation Brands Price vs Sales

For companies like Constellation Brands that are profitable and operate in a mature industry, the price-to-sales (PS) ratio is a helpful benchmark. This multiple reveals how much investors are willing to pay for each dollar of the company’s sales, offering a clearer perspective when earnings may be volatile or impacted by one-off items. Growth expectations, profit margins, and perceived risks all factor into what makes a “normal” or “fair” PS ratio for a company. If investors expect rapid growth and consistent profitability, the PS ratio will generally be higher. On the other hand, greater risks or slower growth tend to bring it down.

Currently, Constellation Brands trades at a PS ratio of 2.87x. Compared to the broader beverage industry average of 2.21x and a peer group average of 2.14x, its valuation is notably higher. However, these averages do not always reflect important factors unique to each company, such as growth rates and resilient profit margins.

This is where Simply Wall St’s proprietary "Fair Ratio" comes in. It is a more tailored measure that incorporates Constellation’s earnings growth, risk profile, margins, industry dynamics, and even its market cap. For Constellation Brands, the Fair Ratio is calculated at 2.61x, just below the current PS ratio. This suggests that, when adjusting for the company’s specific outlook and risks, the market is pricing the shares at only a slight premium to what is justified.

Result: ABOUT RIGHT

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Constellation Brands Narrative

Earlier, we mentioned there is an even better way to understand valuation. Let us introduce you to Narratives. A Narrative is simply your personal story or perspective about where you believe a company is heading and why, supported by your own forecasts of its future revenue, earnings, and fair value. Narratives link the story behind a business directly to financial outcomes, helping you make more informed investment choices rather than relying on numbers alone.

With Narratives, you can easily connect your view of a company's prospects to specific financial assumptions using the accessible tools available on Simply Wall St's Community page, which is trusted by millions of investors. This means you can compare your fair value estimate for Constellation Brands to today’s market price and decide when the stock is attractive to buy, or when it might be time to sell. Narratives update dynamically as new information such as news or earnings emerges. This ensures your opinion can adapt to the latest developments in real time.

For instance, some investors currently believe Constellation Brands could rebound and reach a fair value as high as $247.0 if its restructuring and brewery expansion pay off. More cautious investors see a lower target of just $170.0 if challenges persist.

Do you think there's more to the story for Constellation Brands? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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