We came across a bullish thesis on Constellation Brands, Inc. (STZ) on Value Investing Subreddit Page by RepresentativeAd4940. In this article, we will summarize the bulls’ thesis on STZ. Constellation Brands, Inc. (STZ)’s share was trading at $177.42 as of March 21st. STZ’s trailing and forward P/E were 47.31 and 12.09 respectively according to Yahoo Finance.
Constellation Brands presents a compelling investment opportunity in a market with limited-value stock options. The company’s core business is anchored in its dominant beer brands—Corona, Modelo, and Pacifico—which benefit from strong brand loyalty, particularly among Hispanic consumers, and are widely recognized as go-to beverages for warm weather and social occasions. Despite recent market headwinds, the stock offers an attractive valuation relative to its earnings potential.
Berkshire Hathaway’s recent investment in Constellation at a higher price ($239.35 per share) suggests confidence in its long-term value. At its current price of $177.42, Constellation trades at an inflated P/E ratio of 47.5 due to a $2.25 billion goodwill impairment related to its underperforming wine and spirits segment. Adjusting for this impairment, the true P/E stands at a much more reasonable 10, indicating the stock’s decline has likely priced in this write-down. The wine and spirits segment, representing just 18.1% of net sales, has lower margins and a diminished outlook, but its impairment does not significantly impact the core beer business. Meanwhile, Constellation’s operating cash flows grew 9% year over year, reinforcing its financial stability and ability to generate consistent returns.
A detailed earnings power valuation (EPV) approach suggests a fair value of $193.87 per share, implying an 8.5% margin of safety at current prices. This valuation assumes a sustainable operating margin of 31%, a tax rate of 21%, and a weighted average cost of capital (WACC) of 5.9%. Even with conservative growth assumptions of just 2%, Constellation remains fairly valued relative to its intrinsic worth.
One of the key risks is potential tariffs under a renewed Trump administration, which could impose a 25% import tax on goods from Mexico. Since Constellation’s primary breweries for its flagship brands are in Mexico, this policy could increase costs. However, the company’s ability to pass costs onto consumers may be greater than feared, given the premium status and strong loyalty of its beer brands. Consumers loyal to Modelo and Corona may be less price-sensitive, mitigating the demand impact of any price increases.
Another concern is broader macroeconomic risks, including potential declines in discretionary spending and shifts in consumer behavior. Younger generations appear to be drinking less alcohol overall, raising questions about long-term demand trends. However, beer sales, especially for high-end brands, have historically shown resilience during economic downturns. Craft and premium beers continue to perform well even in recessions, suggesting that Constellation’s flagship brands may be insulated from broader industry declines.
Ultimately, Constellation Brands stands out as a strong value investment at current levels. The company has a dominant position in the beer market, an attractive valuation when adjusted for one-time impairments, and a resilient consumer base. While risks such as tariffs and shifting consumption patterns remain, Constellation’s financial strength and brand equity make it an appealing opportunity with an asymmetric risk/reward profile.
Constellation Brands, Inc. (STZ) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 51 hedge fund portfolios held STZ at the end of the fourth quarter which was 36 in the previous quarter. While we acknowledge the risk and potential of STZ as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STZ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.