The state of Constellation Brands (STZ 0.89%) continues to worsen. Even with increased interest from Warren Buffett's Berkshire Hathaway, tariff worries and falling levels of alcohol consumption prompted the company to lower guidance in September.
However, investors should also take a closer look at the potential buy signals that may have contributed to the growing interest in the stock from Berkshire. Do such conditions justify buying Constellation stock in hopes of a market-beating return five years from now, or should investors stay on the sidelines?
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Why Constellation's pain can continue
First of all, I must issue a mea culpa regarding this stock. I predicted in early August that Constellation in one year would outperform the market. With the latest downgrade and decline, such a relatively quick turnaround looks increasingly unlikely.
Indeed, the state of the company illustrates why the turnaround might take years. For one, over 89% of Constellation's revenue came from beer in the first quarter of fiscal 2026 (ended May 31), specifically beers like Modelo, Corona, and Pacifico that it imports from Mexico. That will subject it to higher tariffs that could cost Modelo its No. 1 position in the U.S. market.
Consumption trends also look increasingly unfavorable. Among all generations, increasing trends toward better health and other factors may have persuaded people to either cut or eliminate alcohol consumption, placing further pressure on the company.
So it likely comes as no surprise that in fiscal Q1, net sales fell 6% to just over $2.5 billion. Also, since the cost of goods sold barely fell and operating expenses increased, the net income fell to $516 million versus $877 million in the year-ago quarter.
The company issued a mid-quarter report to revise its fiscal 2026 net sales estimate downward to a range of -6% to -4%. Although investors should have more clarity on this trend after the release of the fiscal Q2 report on Oct. 6, the update indicates that the pain will persist longer than anticipated.
The five-year bull case
Amid such conditions, Constellation Brands' stock has lost nearly half of its value over the past year, wiping out almost all of its gains over the last 10 years. This means that new investors can buy the stock at a significant discount. Losses stemming from asset impairments temporarily left it without a P/E ratio. Still, a forward P/E ratio of 11 could indicate the selling in this stock is overdone.
This is notable since Berkshire has long sought value plays. It began buying Constellation Brands stock in the third quarter of last year. Also, despite being a net seller of stocks, it has increased its Constellation position every quarter since that time. So it may spot an opportunity that other investors have overlooked.
Berkshire has long made it known its favorite holding period is "forever." The fact that people have consumed alcohol since the beginning of recorded history may be leading Berkshire to ignore the current consumption trends and forecast that demand is not going to go away.
Another factor drawing interest to the stock could be its dividend. Constellation began payouts in April 2015 and has increased its total dividend annually since that time. As a result, its $4.08 per share annual dividend offers new shareholders a dividend yield of 3%, well above the S&P 500 average of 1.2%.
Despite declining net sales, it generated $444 million in free cash flow in fiscal Q1. Since its dividend currently costs the company $182 million per quarter, it remains in a position to hike its payout. That, along with the lower forward P/E ratio, could make it attractive to dividend investors.
Constellation Brands in five years
Over the next five years, Constellation Brands can beat the market. Admittedly, investors who buy now will have to do so in the face of data and trends that appear increasingly bleak for the company. Moreover, the company's release of lower guidance in the middle of the quarter suggests that any recovery will take years.
However, betting that humans will behave toward alcohol in the same way they always have should ultimately be a winning bet. With Berkshire's backing, along with the low forward P/E ratio and increasingly attractive dividend, any improvements in Constellation's current state are likely to take the stock significantly higher.
