Modelo and Corona Brewer Constellation Brands is a tale of two businesses. One of them – beer – is stealing market share left and right. The other – wine and spirits – is an anchor on the stock. Nothing in the company's fiscal 2025 second-quarter results on Thursday changed that narrative. But the next two quarters may make that happen. Comparable net sales for the three months ended Aug. 31 rose 3% year over year to $2.92 billion, essentially in line with the $2.9 billion expected, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) of $4.32 beat estimates of $4.08, LSEG data showed. Constellation Brands Why we own it: Constellation Brands' beer franchise, which includes the iconic Mexican brands Modelo, Corona and Pacifico, is the growth engine and by far the most attractive part of the business. We continue to urge Constellation to focus on beer and divest its struggling wine and spirits unit. Competitors: Anheuser-Busch Inbev, Molson Coors Weight in club portfolio: 2.74% Last purchase: July 29, 2024 Start: May 5, 2022 Bottom line Constellation Brands didn't deliver any real surprises on Thursday — but that was to be expected after the Mexican beer importer revised its guidance For the full year a month earlier largely due to sharper declines in wines and spirits than previously expected. The range of full-year growth forecasts for beer moderated slightly – to 7% at the midpoint of 8%. Investors received the revised guidance in early September with a sigh of relief. That's because third-party data sources were pointing to a tough summer for the beverage category as a whole, prompting analysts to lower their estimates before Constellation said anything. Now investors are welcoming Thursday's results with some selling. Shares fell nearly 4% on Thursday, after rising more than 6% from Aug. 30 — the session before the forecast change — through Wednesday's close. The S&P 500 advanced just 1% over the same stretch. In the fiscal second quarter, Constellation's portfolio of imported Mexican beers continued to grow, albeit at a slightly slower pace than the market expected. Sales were up 6% from a year ago, compared with annual gains of 8%, 11% and 11.8% in the previous three quarters. We do not see moderation in the near term as a cause for concern. For starters, Constellation's clients face the same macroeconomic pressures that affect all consumer-facing companies today. In fact, Constellation feels this way in a distinct way because of its significant exposure to Hispanic consumers at a time when the Hispanic unemployment rate is higher than the national average. Another reason is that demand trends are improving, CEO Bill Newlands emphasized in the post-earnings call — pointing to third-party scanner numbers in recent weeks that were not reflected in the results announced Thursday. “We don't see this as any radical change in the long-term outlook for business. It's purely a short-term issue,” Newlands added, expecting the Fed's latest interest rate cut to help stabilize the employment picture and improve the economy. Improving consumer spending. And the profitability of its beer business — operating margins were an impressive 42.6% in the quarter — puts Constellation in a strong position. In fact, Newlands said Constellation is increasing its marketing spending in the third and fourth quarters to help drive demand for its largest beer brands. “You may have noticed, depending on the football schedule, you can't miss our brands if you watch any football, whether it's college football or the National Football League. So we'll continue to do that because tremendous work has been done on cost and efficiency,” Newlands said. STZ YTD Mountain Constellation Brands stock performance year-to-date. Constellation's wine and spirits division — home to brands like Kim Crawford and Meiomi wines and Svedka vodka — continues to be a thorn in the company's side, with sales and operating income down by double-digit percentages June-August We're still hoping Constellation sells this struggling business – but at this point, it doesn't look imminent On the earnings call, Newlands did talk about some “green shoots” in its larger, higher-end brands. Meiomi, driven by strategic pricing and marketing initiatives in certain markets, Newlands said Constellation is continuing these efforts in the second half of the year, with the expectation that they will help drive sequential improvements in the segment in the third and fourth quarters. We'll believe it when we see it, considering the long struggles of loneliness. Even if Newlands' call for improvement comes true, Constellation's larger beer unit will remain the main driver of growth. However, lifting the anchor is always welcome news, and talk of a booming beer trade will finally no longer need to warn wine and spirits. We reiterate our buy equivalent rating and price target of $300 per share on Constellation shares. Looking ahead, its beer business should continue to gain market share, and it's hard to imagine the wine and spirits unit getting any worse. There is also an emerging story on return on capital, especially as the company reduces its debt to meet previously announced targets. Constellation has plenty of leverage for a buyback with $2.2 billion remaining on its current license, and its free cash flow — the source of money for the buyback — is on track to improve once the company finishes building a new brewery to meet demand. Constellation ramped up the pace of buybacks in the second quarter, repurchasing nearly $250 million worth of stock in the period. This is up from $200 million in the first quarter. Quarterly Commentary Sales at Constellation's wine and spirits division fell 12.5% year over year to $388.7 million, beating estimates of $413.6 million, according to a Bloomberg consensus. Operating income of $70.5 million beat estimates by $6.6 million but was down approximately 13% year over year. The operating margin for this sector was better than expected at 18.1%. While margins were roughly in line with the same period last year, they were up on a sequential basis from 15.3% in the first quarter. The changes in product mix and lower volumes were offset by lower expenses and higher contractual distributor payments, the company said. Shipment volumes fell 9.8%, worse than expected and steeper than the 5.1% decline in the first quarter. The business “continues to face challenging market conditions,” the company said in a press release, “primarily in the U.S. wholesale channel across most price segments in the wine category.” Depletion cases — which measure the number of cases a distributor sells to retailers — fell 17.6% compared to the same period last year. Looking for a bright spot, the company highlighted that its smaller spirits portfolio saw attrition growth of 1.3%, driven by strength in its Mi Campo tequila and Nelson's Green Brier brands. The beer sector continues to do the heavy lifting, and that may be an understatement. Sales rose 6% year over year to $2.53 billion, actually matching Bloomberg's estimate of $2.52 billion. Operating income rose 13% year over year to $1.78 billion, beating expectations of $1.025 billion. Operating margin of 42.6% was arguably the most impressive line in the report, beating analysts' expectations of 40.6% and expanding from 40.7% in the first quarter. Cost saving initiatives and favorable pricing were among the drivers of strong margin performance, according to Constellation. Shipment volumes rose 4.6%, slightly higher than Bloomberg's estimate of 4.19%. Attrition growth was 2.4%, including one fewer selling day in the quarter, missing estimates of 4.8%. However, Constellation saw growth in demand for the Modelo Especial, which rose 5%, and the Pacifico, which jumped 23%, which likely indicates that its popularity continues to gain strength in markets beyond the West Coast. Additional Corona depletion decreased 3% in the quarter. Its beer business was the No. 1 winner in the category this quarter and in the top three in the entire beverage industry, Constellation said, citing third-party data. Guidance Constellation's 2025 financial guidance is unchanged from the big revision a month ago. The adjusted EPS range is $13.60 to $13.80, which excludes the previously announced writedown of up to $2.5 billion for its wine and spirits business. Sales are expected to decline 4% to 6% in wines and spirits. Meanwhile, the beer unit is expected to see net sales growth of 6% to 8%. Adjusted operating income growth, which also excludes debt write-downs, is expected to grow between 8% and 9%. Free cash flow for the full year is expected to be between $1.4 billion and $1.5 billion. (Jim Cramer's Charitable Trust is long STZ. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. 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Bottles of Corona, Modelo and Pacifico beer are displayed on a shelf at a supermarket on April 6, 2017 in San Rafael, California.
Justin Sullivan | Getty Images
Modelo and Corona Brewer Constellation brands It is a tale of two companies. One of them – beer – is stealing market share left and right. The other – wine and spirits – is an anchor on the stock. Nothing in the company's fiscal 2025 second-quarter results on Thursday changed that narrative. But the next two quarters may make that happen.