Constellation to Tap Into Craft Beer's Growth

Perhaps it was a point of pride with its distinctly painted clear glass bottles or the whole ethos of thumbing a lime into the bottle's neck before drinking a beer, but whatever the rationale, Mexican brewer Grupo Modelo made a conscious marketing decision not to offer its Corona brand in a keg.

However, when Constellation Brands (NYSE: STZ  )  acquired Crown Imports last June as part of Anheuser-Busch InBev's (NYSE: BUD  ) takeover of Grupo Modelo, it made a just-as-conscious decision to put the beer on tap. While it began as a test-market trial, it's about to explode into a nationwide rollout with the potential to generate as much as 10% of Constellation's total business over time.

The alcoholic beverages distributor reported some heady quarterly earnings results yesterday, driven in large measure by the Crown acquisition. Third-quarter earnings jumped to $1.10 per share, a 75% increase over the year-ago period and substantially higher than the $0.91-per-share result Wall Street expected. That allowed it to raise its full-year earnings guidance to a range of $3.10 to $3.20 per share from its prior outlook of $2.80 to $3.10 per share, which was above analyst forecasts of $3 a stub as well.

The frothy results come even though Constellation's wine and spirits segment turned in a lackluster performance. Sales there were 3% higher in the quarter, but because of higher promotion and marketing costs, operating income declined year over year and the distributor now expects full-year operating income for wine and spirits to be flat to slightly down.

Moreover, while Anheuser-Busch's third-quarter results were better than analysts expected because of greater savings than anticipated from the Modelo acquisition, it still reported that volumes of beer sold were down across all regions except Asia and Western Europe, including in the U.S. even though it owns half the market. Similarly, Molson Coors saw both sales and volumes drop in the quarter across all markets.

So Corona sales were growing despite the largest brewers seeing their volumes decline, reminiscent of how craft beer sales and volumes continue to be the bright spot in the industry. Boston Beer posted 29% growth in shipments versus the prior-year period and Constellation thinks it can perform just as well as the craft brewers without resorting to faux craft beers like Bud and Molson have done. Simply by putting Corona on tap, it can gain the same benefit. 

Craft brewers need to do a lot of convincing to get their small beers that no one's heard of put on tap. Corona already has the name recognition and the ability to generate sales such that the leap needed to add a tap for it is far, far smaller. And beyond just adding draft beer, its whole positioning on retailer shelves is similar to craft beer from the retailer's perspective, because it offers them higher profitability.

As I noted last quarter, the stars are aligning for Constellation Brands based on its nexus to the craft beer movement, and as the latest results show, that trajectory is only going higher. Trading at just a fraction of its sales and offering far more of a discount on that basis than any other brewer, this stock could still be the star of your portfolio.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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