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Premium spirits and beverage manufacturers Constellation Brands Inc. (NYSE: STZ) The stock has been trading around 50 points for over a year. Alcohol theoretically falls into the category of commodities that are virtually recession-proof. However, there is a peak where consumers choose to spend less on booze instead of drinking less. This could potentially trade premium brands for cheaper ones.
So while alcohol may be resilient in principle, the reality is that cheap alcohol tends to weather economic downturns better than fine liquor. It is indicated by opting for cheaper private label brands. Kroger (NYSE: KR).
The “Trade Down” Dilemma
In a nutshell, this is the Constellation brand’s dilemma. Producers of premium alcohol brands such as Corona, Modelo Beer, Kim Crawford, Rufino Wines, Casa Noble Tequila and Svedka Vodka face more competition from cheaper brands such as: Anheuser-Busch InBev SA/NV (NYSE: BUD) When Molson Coors Beverages (NYSE: TAP)In addition, inflationary pressures continue to drive input costs high and are expected to remain in the high single-digit range in fiscal 2024. As a result, there is no Constellation brand stock on rail bars.
In January 2023, Constellation Brands announced its November 2022 results for the third quarter of fiscal year 2023. The company reported his earnings per share (EPS) at $2.83, while consensus analyst estimates were $2.87, a miss (-$0.04) per share. Revenue of $2.44 billion increased 9.2% year over year, beating analyst estimates of $2.38 billion.
The company announced full-year 2023 EPS guidance of $11.00 to $11.20, compared with analyst consensus expectations of $11.05. Beer net sales are expected to increase 9% to 10% and operating income is expected to increase 4% to 5%. Wind and Spirits is expected to decline to (-2%), with operating profit increasing from 3% to 5%.
This does not include net sales of $44 million and gross profit less marketing of $26 million. The company increased its 2023 operating cash flow target to $2.8 billion from $2.6 billion and its free cash flow generation forecast to $1.6 billion from $1.5 billion.
Conference call essentials
Bill Newlands, CEO of Constellation Brands, said the company’s premium beer business continues to lead share growth in the U.S. beer category for the sixth consecutive quarter with its Corona Extra and Modelo Especial labels. Modelo Especial was the top share taker and number one premium beer brand, and Corona Extra was his third share taker and number three high-end brand.
Beer business sales are up 54% compared to pre-pandemic levels in Q3 2019.
In the Wine & Spirits business, the largest luxury brands Kim Crawford, Mayomi, High West and The Prisoner delivered 72% dollar sales growth compared to pre-pandemic levels. Additionally, since 2020, he has acquired five of his brands: My Favorite Neighbor, Empathy, Halpern & Kings, Bronco Wines and Austin Cocktails, but has sold 36 of his brands in the mainstream segment.
This has reshaped the portfolio from 34% pre-pandemic to 62% high-end brands.
About exhaustion growth
He said depletion growth is normalizing as the beer business slowed to 5.7% in the quarter. This indicates that beer sales may plateau, which is a cause for concern, especially after a period of unusual circumstances. Several headwinds were to blame, including worsening weather in California that pushed the depletion rate into his double digits in November 2021 due to better weather and improved economic conditions.
This makes for a tough comp. His Modelo Especial, a top brand, delivered his 4.4% exhaustion growth, after lapping his 13.2% exhaustion growth in the same period last year. However, the brand has achieved depletion growth of 9.9% from FY2023 to date. The company’s newest premium beer brand, Pacifico, delivered 26% exhaustion growth, while Modelo Chelada still has a long runway to go as he delivered 44% exhaustion growth in the quarter.
Erosive pricing power
The CEO ended with a comment about preparing for short-term headwinds. ‘twenty four.
In addition, while some input costs are below peaks at the start of the fiscal year, we expect fiscal year 24 inflation to remain above historical trends and remain in the high single-digit range. As always, we will continue our disciplined approach to managing these evolving conditions through cost reduction initiatives.
However, these persistent inflation headwinds will add to the double-digit cost rises faced in 2023. This shows that pricing power is weakening as consumers face economic challenges.
1 Year Weekly Rectangle Trading Range
The STZ stock is in the 50 point range, as indicated by the weekly rectangles on the candlestick chart. From lows of $207.35 to highs of $258. As the stock approached $261.52, there were two instances that initially appeared to break out of the highs, but they returned to the rectangular range in less than a week.
The most recent breakout attempt in November 2022 has shook the breakout would-be by crashing towards the lower range of $208.12.
Weekly Market Structure Low (MSL) buying was triggered again at the $226.84 breakout. This is because the weekly Stochastic is considering crossing up to support the bounce. The weekly 20-period exponential moving average (EMA) has resistance at $234.43, breaking above the weekly 50-period moving average at $237.48.
The weekly market structure high (MSH) sell trigger at $241.89 is the next important resistance test before another potential execution to the upper rectangular range resistance at $258. Pullback supports are $222.39, $218.10, $214.48, $210.75, weekly swing lows of $207.35 and $202.70.
Listen to this before you consider Constellation Brands.
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