Constellation Brands: Chasing the Baton; Maintain Hold, PT to $147

Research evidence excerpt

Constellation Brands: Chasing the Baton; Maintain Hold, PT to $147

0.4 3,470.2

is driven by a balance of fixed cost absorption/volume/pricing offset by negative product mix and *Rev. (MM)

higher depreciation as the Veracruz facility comes online. Higher beer opex in 2-3Q (85bp y/y as %

of sales) leads us to lower our F27 EPS to $11.67 (prior $11.70).

4. Direction of Travel (3 months) - Neutral to Positive: We think beer depletions should improve

in F2Q (modeling +1%) given the World Cup uplift and easing pressures on fuel prices in June.

Marketing spend will step up materially in 2-3Q (competitive summer selling season/NFL). We

model operating margin compression in 2Q (-54bp; beer segment -85bp y/y).

5. 18 Month Outlook - Neutral: We like the idea of white space expansion. The on-premise push

makes sense. We will have a watchful eye on what it might be. Right now, execution on the core

matters most. Pacifico is contributing more (+21% depletions in F1Q), but core brands need to

return to depletions growth. Mgmt is leaning more into occasion-based marketing and "scaled

brand playbooks". This is a good way to support the on-premise push. However, we're sidelined as

this initiative is still in its early days.

6. Investment Thesis: Constellation's beer portfolio is no longer delivering run-rate growth in the

MSD-HSD% range. Being landlocked in a challenged US beverage alcohol market makes it difficult

to justify shares returning to 18x FY2 P/E (10Y historical average), in the absence of improvement

in its core consumer.

7. Valuation: To expand the multiple, we believe there needs to be proof that the company can

Kaumil Gajrawala * | Equity Analyst

regain momentum in F27 and beyond. PT to $147 based on 10x our F28 Adj. EBITDA of $3.6bn.