Constellation Brands (STZ -1.68%) (STZ.B), one of the world's top producers of alcoholic beverages, is often considered a recession-resistant stock. However, the COVID-19 recession this year was more challenging than previous economic downturns, since it shut down restaurants, bars, and other businesses that serve Constellation's drinks.
Constellation's stock plunged with the broader market back in March, but it's still risen about 15% over the past 12 months. That resilience suggests investors are expecting its business to recover after the pandemic ends, but will the stock rise much higher in 2021?
Understanding Constellation's business
Constellation owns over 100 brands of alcoholic beverages. Its top beers include Corona, Modelo, and Pacifico; its wines include Kim Crawford, Meiomi, and Copper & Thief; and its spirit brands include Casa Noble, SVEDKA, and High West. It also owns a stake in the cannabis company Canopy Growth (CGC -6.00%).
Constellation generated 67.3% of its revenue from beer sales in fiscal 2020, which ended on Feb. 29. Another 28.4% came from its wine brands, and the remaining 4.3% came from spirits.
Its total sales grew 3% to $8.34 billion in 2020. Its beer sales rose 8%, but its combined sales of wines and spirits declined 6%. It attributed that slowdown to the ongoing divestments of its cheaper wine and spirit brands, the premiumization of its remaining brands, and competition from hard seltzers and premium spirits among younger drinkers. Its adjusted EPS increased 6%.
Those growth rates looked stable, but Constellation's sales fell 5% year-over-year (and dropped 3% on an organic basis) in the first half of fiscal 2021 as businesses shut down during the pandemic.
On an organic basis, which excludes the company's recent divestments, its beer sales fell 1% and its combined wine and spirits sales fell 9%. Its adjusted EPS, which excludes its stake in Canopy, declined less than 1% as its premiumization strategy and savings from divestments partly offset its declining revenue.
Constellation hasn't offered any guidance for the full year, but analysts expect its revenue to stay roughly flat this year as its adjusted earnings grow 3%. Next year, they expect its revenue to stay flat again as its adjusted earnings grow 8%.
Constellation faces tough secular headwinds
Constellation believes its focus on higher-end brands will boost its profits, while new products like Corona Hard Seltzer and Modelo Chelada Limon y Sal will win back younger customers. It also believes dumping weaker brands, like its craft beer brand Ballast Point and Black Velvet whiskey, will streamline its sprawling business.
But Constellation is also facing an uphill battle against two secular headwinds. First, Americans are drinking less beer and wine. According to the IWSR Drinks Market Analysis, beer consumption in the U.S. declined 2.3% in 2019, and wine consumption dropped 1%.
That shift was mainly caused by Millennial drinkers, who favor spirits and hard seltzers over beer and wine. Consumption of spirits in the U.S. rose 2.3%, led by vodka, but Constellation only generates a sliver of its sales from spirits. That trend could also be affecting younger drinkers in other markets.
It also makes Brown-Forman (BF.A -3.05%) (BF.B -2.90%) -- which generates most of its revenue from premium spirits like Jack Daniel's whiskey, BenRiach scotch, Finlandia vodka, Herradura tequila, and Chambord liqueur -- a more compelling investment than Constellation.
Brown-Forman was also affected by the pandemic, but analysts expect its revenue and earnings to rise 2% and 7%, respectively, this year. Next year, they expect its revenue and earnings to grow 7% and 2%, respectively.
Where will Constellation's stock be in a year?
Constellation's stock won't drop off a cliff in 2021, and its recent divestments, premiumization strategy, and Corona's hard seltzer might generate some fresh growth. But it will likely underperform many of its industry peers, including Brown-Forman, which are better aligned with shifting consumer tastes.
Constellation's stock also isn't particularly cheap at 21 times forward earnings, and its forward yield of 1.4% probably won't attract serious income investors. Therefore, Constellation might remain a safe stock as it treads water next year, but there are much better plays in the alcoholic beverages sector.