With the onset of the COVID-19 pandemic, Constellation Brands (STZ -0.14%) ran into a situation it had never encountered before: Many of its primary channels for making sales were closed off.
The premium beer, wine, and spirits distributor saw bars, restaurants, and other venues where people gathered and drank shut down, while the travel and tourism markets -- another big driver of alcoholic beverage sales -- evaporated.
Although alcohol is considered a recession-resistant business -- because when times get tough, you can still drown your sorrows -- if a large share of the places that pour your beverages aren't pouring, the model gets shaky.
But the economy is reopening again, restaurants and bars are serving customers, and Constellation's stock has more than doubled from its March 2020 low point. So is now the time to buy its shares?
Brewing up growth
Constellation owns over 100 brands, but the most important ones in the portfolio are the Corona and Modelo families of beer, which account for more than two-thirds of its revenue.
Unlike many of its beer industry peers, Constellation continues to deliver growth with its actual beers. Boston Beer (SAM 0.01%) now produces more hard seltzer than beer, but Constellation's Corona and Modelo lines are still enjoying growing sales.
For example, depletions of Corona Premier, the light beer it introduced in 2019, grew by more than 20% in its fiscal third quarter, which ended Nov. 30, while for the overall Corona family of beverages, sales volumes grew 12%. Of course, that did include Corona Hard Seltzer, which within months of being introduced leaped into fourth place in its niche with a 6% share of the market. It is, however, still far behind the leaders -- Mark Anthony Brands' White Claw and Boston Beer's Truly.
In contrast, the Brewers Association says that small and independent brewers are on track to report declines of 7% to 8% for 2020 because they rely heavily upon the out-of-home market for sales.
Yet the data does hold some hope, because 10% of sales are draft beer and 18% is sold on-premises. With COVID-19 vaccinations now in full swing, going back out for a pint will be commonplace again, and the surge in sales could come in a big wave, too, once people are finally safe to socialize in groups again.
Still hazy days
While a rapid recovery of beer and wine sales should provide an immediate tailwind for the company, another potential one sits further down the road: the federal legalization of marijuana.
Constellation was the first major beverage company to take a stake in a marijuana producer with its $4 billion investment in Canopy Growth (CGC -5.96%) (a stake which it has since increased). Other consumer products companies followed suit, and though those investments haven't paid off yet for the first movers, they undoubtedly will.
Cannabis-infused beverages are the first natural extension of such a partnership, but edibles and other branded products are clear opportunities too, and Constellation's broad distribution network will help get those products onto U.S. store shelves.
The legal weed industry remains hampered by federal prohibition, but that has its best chance yet for being overturned with the Biden administration in the White House and the Congress controlled by the Democrats.
Still, even if Washington does take action to legalize cannabis, the government could put roadblocks in the path of marijuana producers that limit the size of the market. For example, the Canadian government's failures to put a workable regulatory scheme in place have held back the industry north of the border.
Constellation Brands stock trades at 24 times trailing earnings and 22 times next year's estimates. Those might appear to be expensive valuations until you look at other brewers and distillers like Boston Beer and Brown-Forman, which carry much greater premiums. Yet at 27 times its free cash flow, Constellation is no bargain-basement stock.
Still, an argument can be made that the Corona owner should be priced like its rivals. It is still selling a growing volume of beer while its competitors' volumes are contracting. In the growth area of hard seltzer, it has made a big splash and has more levers to pull that could allow it to gain additional ground. And the cannabis segment is untested, but it could prove to be the biggest growth driver yet.
While I might not make it a large holding within my portfolio, Constellation Brands has proved resilient through turmoil, its dividend that yields 1.3% annually remains intact, and it has near-term drivers that could result in its share price popping a cork.