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Price: $129.80
Fair value: $173.00
Discount: 25.0%
Uncertainty: High
LSEG rating: 2.40
Moat: Wide
Next earnings: 2027-01-06
Next earnings is estimate: Yes
Company name: Constellation Brands
Sector: Beverages
About: Constellation Brands is the second-largest beer company in the US by sales. It has an exclusive and perpetual license to make Corona, Modelo, Pacifico and Victoria and to sell them in the US. It makes these beers in its own breweries in Mexico and builds a third large brewery in Veracruz. Modelo Especial is the top beer brand in the US by dollar sales. Beer gives more than 90% of net sales and almost all of the operating income: in the quarter to August 31, 2026, beer net sales were $2.47 billion at a 39.0% operating margin. The company also sells higher-end wine and spirits, such as Kim Crawford, The Prisoner, Robert Mondavi and High West, after it sold its lower-priced wine brands in 2025. It sells to distributors, which sell to stores, bars and restaurants. Net sales in the year to February 28, 2026 were $9.14 billion.
Thesis: The market prices Constellation lower because fewer people buy its core beers and its largest customer group is under pressure. Hispanic consumers give about 40% of its beer sales, against about 15% for US beer as a whole, and the company says that they face pressure on jobs and household money. Beer depletions, the sales from distributors to stores, fell 0.3% in Q1 and 0.6% in Q2 of the year to February 2027. Modelo Especial fell about 2% and Corona Extra about 5% in Q2. In April 2026, the company withdrew its outlook for the year to February 2028, and it expects flat beer net sales this year. Investors fear that the long growth of Mexican beer in the US has ended. For the gap to close, three things must be true. Beer depletions must turn positive again, as the CEO said that the trend improved in September 2026. The beer operating margin must stay within the 37% to 38% outlook while marketing spend rises. Comparable EPS must reach the $11.20 to $11.90 outlook, and free cash flow must reach $1.6 to $1.7 billion, so that buybacks can continue at a net leverage of about 3.0 times. The tests are the Q3 report in early January 2027, the Q4 report in April 2027 with the new outlook, and the monthly scanner data. If depletions grow again in 2027, the gap can close over the next four to six quarters. The main risk is that the pressure on Hispanic consumers and lower alcohol use by young adults last for years.
Risks: Hispanic consumers give about 40% of the company's beer sales. The company says that they face pressure on jobs and household money, which can reduce how much beer they buy. Depletions of Modelo Especial and Corona Extra fell in both quarters of the year to February 2027. The CEO said that people now buy beer more for special occasions and less by habit. The company spends more on sports, music and events to reach younger drinkers. If US beer volume keeps falling, growth from price increases and share gains may not be enough. The company makes all of its US beer in Mexico. Tariffs, border rules or a change in US and Mexico trade policy can raise costs. The aluminum tariffs raised can costs until April 2026, when the US removed beer from their scope. Debt was about $10.3 billion at August 31, 2026, and the company keeps net leverage at about 3.0 times. Lower beer profit would leave less cash for buybacks and for the Veracruz brewery. The new CEO started in April 2026 and raised marketing spend. The beer operating margin fell 1.6 points in Q2 of the year to February 2027. If the spend does not bring sales growth, margins can fall more.
Balance sheet: Cash: $99M Debt: $10.3B Net debt: $10.2B Interest cover: 9.5× Undrawn credit line: $2.1B, to April 2030 Debt due within 12 months: $1.2B Constellation funds itself with unsecured senior notes, commercial paper and a $2.25 billion revolving credit facility that ends in April 2030. At August 31, 2026, it had $116.5 million of commercial paper, $1,103.0 million of long-term debt due within one year and $9,096.2 million of other long-term debt. Unused capacity under the revolving credit facility was $2,122.6 million after the commercial paper. Interest cover is operating income divided by interest expense for the six months to August 31, 2026. On September 18, 2026, the company repaid $600 million of notes due 2027 with commercial paper. The same day, it signed a $300 million delayed-draw term loan, which it can draw for nine months. About $1.8 billion of debt is due in the year to February 2028. The company keeps comparable net leverage at about 3.0 times and calls its rating investment grade. It bought back $530 million of shares in the year to date through September 2026, and it pays a dividend of $1.03 per share each quarter. It expects capital spending of about $800 million and free cash flow of $1.6 to $1.7 billion in the year to February 2027. As of 2026-08-31.
Checkpoints: Jan 6, 2027 (estimate): Q3 results: beer depletions. Pending. Watch: Positive beer depletions and a beer operating margin within 37% to 38% pass; depletions that fall again with a lower EPS outlook fail. Apr 2027 (estimate): Q4 results and outlook for the year to February 2028. Pending. Watch: An outlook with beer net sales growth and comparable EPS growth passes; a second year of flat or lower beer sales fails.
Recent events: 2026-10-06: Constellation reported Q2 results for the year to February 2027. Net sales were $2.63 billion, up 6%, and comparable EPS was $3.74, up 3%. Beer shipments rose 5.5% as distributors rebuilt their stock, but depletions fell 0.6%. The beer operating margin fell 1.6 points to 39.0% because of higher marketing spend. The company raised its reported EPS outlook and kept its comparable EPS outlook of $11.20 to $11.90. 2026-10-06: Constellation bought SpikedAde, a vodka-based ready-to-drink brand, for $75 million at closing and up to $278 million more over five years, based on its results. 2026-09-18: Constellation repaid $600 million of 4.35% notes due 2027 early with commercial paper. It also signed a $300 million delayed-draw term loan. 2026-06-30: Constellation reported Q1 results for the year to February 2027. Beer net sales grew 2% and beer depletions fell 0.3%. Wine and spirits net sales fell 47% after the 2025 wine sales, but grew 8% on an organic basis. The company kept its comparable EPS outlook. 2026-05-18: Constellation repaid $600 million of 3.70% notes due 2026 early, with new 4.85% notes due 2031 and commercial paper.