New analyst reports support our view of Constellation as a great defensive play

Published Tue, Jun 21 20223:55 PM EDTUpdated Tue, Jun 21 20224:13 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Corona owner Constellation Brands (STZ) remains one of our favorite investment ideas in this tough market, and two pieces of Wall Street research out Tuesday share our outlook. In a deep-dive note to clients, Morgan Stanley analysts reiterated their overweight rating on STZ shares, saying they continue to believe Constellation's long-term growth prospects are better than the beverage industry as a whole. Meanwhile, UBS analysts kept their buy rating on Constellation, while downgrading three peer beverage stocks — Boston Beer (SAM), Molson Coors (TAP) and Keurig Dr. Pepper (KDP) — to hold. (UBS also kept its buy rating on Coca-Cola (KO), PepsiCo (PEP) and fitness drink maker Celsius Holdings.) Bottom line In recent months, we've repositioned our portfolio to be more defensive. Constellation is one of the stocks we've bought as part of that shift. We believe Constellation, which also makes Modelo and Pacifico, is an attractive growth-at-a-reasonable-price stock with a business that historically holds up well during an economic slowdown. As we've seen lately, Wall Street is worried about a recession. This makes STZ shares a place to look for relative safety right now. Then add in the favorable, big-picture fundamentals around its Mexican beer portfolio and the potential shift to a single-class stock structure, and we see a lot to like as investors in Constellation Brands. We are mindful of potential margin risks due to inflationary pressures, but generally think management's forecast for the year was conservative. "I would not sell the shares here," Jim Cramer said during Tuesday's "Morning Meeting," as Constellation traded up only 0.7% during the session around $229 per share. The stock later rallied over 3% Tuesday. We bought 25 shares of Constellation on June 14, and another 25 shares on June 17. Following last week's two trades, the portfolio owns 330 shares of STZ and increased its weighting to 2.79%. What Morgan Stanley says At the core of Morgan Stanley's extensive piece on Constellation is a belief that both the near- and long-term situations look bright for the company, and its stock price does not fully reflect it yet. The firm raised its price target by $4 to $298, implying over 30% upside from Friday's close at $227.70 per share. Here's some of what Morgan Stanley cites as positives and leads them to expect: 1) an upside earnings surprise when Constellation reports fiscal 2023 first-quarter numbers June 30; and 2) "enduring" long-term revenue growth in the high-single digits: Strength of the Modelo brand. For example, the analysts cite U.S. scanner data that indicates Modelo sales are up 24% year over year so far in the company's fiscal year. They see that as both good news in the short run and also supportive of their long-term belief that Modelo can keep growing share as it expands into underpenetrated markets. For example, they say Modelo volume could grow 60% if its consumption by non-Hispanic drinkers reached Corona's consumption mix percentage in the channels they track. Hard seltzer woes. Morgan Stanley believes the slowdown in hard seltzer sales is ultimately helpful for Constellation, even though it makes a Corona Hard Seltzer. That is because, the analysts write, there appears to be some relationship between hard seltzer's market-share gains in recent years and the market share of imported beers like Constellation's leading trio. As hard seltzer cools, they expect that to mean share gains for imports. Pricing power and valuation. Citing scanner data, the analysts write that Constellation's price increases over the past 12 weeks appear to be running above the company's guidance for fiscal 2023. On the stock, specifically, Morgan Stanley argues it is undervalued when considering the revenue growth compared to its beverage industry peers. It's worth pointing out that the analysts now consider STZ to be their second-favorite pick right now in the sector, behind Monster Beverage (MNST). They cite Constellation's outperformance compared to the S & P 500 over the past three months as the reason why Monster was elevated to their top pick. What UBS says The note from UBS focused on the analysts' entire coverage universe in the beverage industry. Its main point was basically this: The analysts consider beverages to be their favorite sub-sector of the consumer staples group (for now), but believe investors should be selective as it's already been outperforming. This is why the three aforementioned stocks were downgraded to neutral, while UBS continues to view other beverage names such as Constellation as buys. Here's some other highlights from the UBS note: Organic revenue growth. A key reason UBS favors Constellation, Coca-Cola, Pepsi and Celsius right now is a belief that those four companies can post outsized organic revenue growth beyond this year, when Covid recovery tailwinds generally helped the whole group. Organic revenue growth excludes sales growth stemming from acquisitions made over the past year. STZ valuation. The analysts see Constellation's stock trading at relatively attractive levels and have a $270 price target on shares based on a forward P/E of 21. When looking at beverage stocks' forward multiples versus organic revenue growth projections, UBS says Constellation shares look the cheapest. STZ's current forward P/E is 19.5, according to FactSet. Recession risks. As we mentioned earlier, a possible recession is top of mind for investors. UBS says their analysis of sales data from 2008-2009 indicates Constellation does not have "significant trade down risk" even though their imported beer offerings fall into the premium category. "Sales and share performance slowed marginally as below premium beer growth accelerated, but that largely came at the expense of domestic premiums," they wrote. (Jim Cramer's Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Trucks with Constellation Brands Inc. Corona and Modelo beer sit during a delivery in the Zona Rosa neighborhood in Mexico City, Mexico.

Susana Gonzalez | Bloomberg | Getty Images

Corona owner Constellation Brands (STZ) remains one of our favorite investment ideas in this tough market, and two pieces of Wall Street research out Tuesday share our outlook.