Stock Analysis & Ideas

Constellation Brands (NYSE:STZ): Take a Shot on This Alcohol Stock

Story Highlights

STZ stock took a nosedive recently after a disappointing earnings report. The year is young, however, and dividend-paying Constellation Brands deserves credit for remaining resilient despite sticky inflation.

You might not have considered investing in an alcohol retailer, but Constellation Brands (NYSE: STZ) stock deserves your consideration. I am moderately bullish on STZ stock, albeit with caution, as Constellation Brands’ success or failure will depend largely on the health of the overall economy and on the trajectory of inflation.

Headquartered in New York, Constellation Brands sells beer, wine, and other alcoholic beverages internationally. The company’s most famous alcohol brands are Corona and Modelo.

It’s not a sin to invest in a sin stock like STZ. However, Constellation Brands is arguably a cyclical business, not a defensive one; alcohol isn’t a necessity, and people may reduce their beer and wine consumption if macroeconomic conditions worsen. On the other hand, if conditions improve, Constellation Brands should benefit, and investors can collect dividend distributions while they wait.

The Market Punished STZ after its Q3-2023 Report

Earnings events can be treacherous, and Constellation Brands’ investors learned this lesson the hard way after the company reported its fiscal Q3-2023 results, which ended on November 30, 2022. The market’s reaction to the results was harsh and perhaps overdone, as investors should consider Constellation Brands’ resilience in the face of inflation, supply-chain constraints, and recession fears.

In an interview, Constellation Brands CEO Bill Newlands acknowledged a concern that many consumer-brand executives faced in 2022, “The inflationary environment has hung on a bit longer than we had hoped.” Furthermore, Newlands basically admitted that Constellation’s customers drank less beer and wine after the company raised its prices. As he politely put it, “Consumers, at times, when you take pricing– and we took some additional pricing in October– have some short-term sensitivity to it.” The Wall Street Journal was more direct, publishing the headline, “Beer Sales Drop as Consumers Balk at Higher Prices.”

At least, we can say the CEO is aware of the problem and evidently plans to address it. “The consumer is overly sensitive to pricing actions,” Newlands warned, adding, “We need to be careful in balancing our growth profile and our pricing profile.”

Thus, you’re better off avoiding STZ stock if you feel that supply-chain issues will persist and that inflation will remain elevated in 2023. Constellation Brands’ business seems particularly sensitive to CPI changes, so you’ll definitely want to keep an eye on that.

Despite Investors’ Reaction, Constellation Brands’ Results Weren’t Terrible

We’ll get down to the nitty-gritty of the data in a moment, but first, we should take note of the market’s response, which was dramatic. After Constellation Brands reported its quarterly results earlier this month, STZ stock tanked 9% for its deepest single-day decline since 2020. Were the company’s results all that bad, though?

During the reported period, Constellation actually managed to grow its revenue on a year-over-year basis to $2.44 billion, versus $2.32 billion in the year-earlier quarter. The economy seemed to be running on all cylinders in late 2021, and inflation wasn’t as bad, so Constellation Brands’ revenue growth since that time is actually pretty impressive.

Furthermore, Constellation’s quarterly net income hardly decreased at all, reaching $467.7 million in the most recently reported quarter versus $470.8 million in the year-earlier period. Plus, the company increased its dividend payout during that time frame. Constellation Brands’ annual dividend yield is 1.4%, so there’s some incentive for income seekers to take a long-term position if they’re not anticipating a nasty recession.

For his part, five-star RBC analyst Nik Modi doesn’t seem too anxious about Constellation Brands’ prospects. He assigned an Outperform rating to STZ stock along with a price target of $300, suggesting that there’s room for share-price improvement along with the quarterly dividend payouts. Modi was apparently optimistic when traders dumped their Constellation shares, stating, “We see today’s likely weakness as an opportunity to buy the stock.”

Is STZ Stock a Buy, According to Analysts?

Turning to Wall Street, Constellation Brands is a Strong Buy based on 13 Buys and four Hold ratings. The average STZ price target is $258.29, implying 15.4% upside potential.

Conclusion: Should You Consider Constellation Brands Stock?

I won’t go so far as to say there’s a constellation of reasons to own Constellation Brands stock. Indeed, there are two good reasons: the economy might improve, and you can collect dividends along the way.

The dividends won’t likely make up for any share-price losses, however, if the economy sours and alcohol sales don’t pick up soon. Hence, STZ stock is worth considering for a small share position as long as you’re aware of the risks involved and expect the CEO to effectively manage Constellation Brands’ supply chain and inflation headwinds in 2023.

Disclosure

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