Analyst says buy Constellation Brands, makes a bullish case we can agree on

Published Tue, Oct 11 20221:26 PM EDT

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

Wedbush Securities on Tuesday tapped Constellation Brands (STZ) as its favorite stock to own in the alcoholic beverage sector, authoring a bullish thesis on the Club holding that touched on many of the same reasons we've liked the Corona parent this year. In a note to clients, Wedbush started coverage of Constellation with the equivalent of a buy rating and a $275 price target, representing about a 24% upside from where shares closed Monday. The stock traded up more than 1.6% Tuesday to nearly $225 per share, outperforming the broader market. Even earlier in the session, when all three major U.S. stock indexes were in the red, STZ shares were slightly in the green. "In the current environment, STZ's high-end beer portfolio looks to be immune from any potential downtrading based on what we are seeing at retail," Wedbush analysts wrote. "Accelerating beer growth, favorable long-term demographic trends, a best-in-class operating margin profile and optionality to pull the lever on pricing, if need be, make STZ our highest conviction Outperform rating and Top Pick among all the companies under our coverage." Details on the call In beginning its coverage of the alcoholic beverage industry, Wedbush told clients it favors names that benefit from secular trends such as premiumization — consumers' growing preference for what they perceive as higher-quality products, and a willingness to pay up for them. For that reason, it's no surprise the firm likes Constellation Brands. The brewer of Corona, Modelo and Pacifico has been leaning into that trend, positioning its lineup in both beer and wine/spirits to that expanding part of the market. It furthered that approach last week, when it divested some of its mainstream wine brands to sharpen its focus on higher-end offerings like The Prisoner Wine Company. In addition to calling out Constellation's impressive market-share gains within beer, Wedbush highlighted the fact the company's beer portfolio "over-indexes to Hispanic consumers, who should continue to make up a larger percentage of the U.S. population" in the coming years. This is notable because it could help fuel Constellation's expansion in a very mature segment like beer, where growth is significantly more scarce than, say, cloud computing. "Pricing optionality" — jargon that really just means raising prices to help offset rising costs — is another part of Wedbush's bullish case. On last week's second-quarter earnings call, STZ management signaled its intentions to raise prices across its beer portfolio by 2% to 3% in fiscal 2023. That's up from its prior guidance of 1% to 2%. The Club's take Wedbush's positive note comes less than a week after Constellation released its very solid second-quarter results . Just as we saw little to nitpick in the company's numbers and guidance, we see little to disagree with in Wedbush's STZ thesis. We felt comfortable buying the stock here, evidenced by our small purchase of 20 more shares at roughly $221.19 each on Monday . In general, though, our attitude toward the market is rather cautious. While we recognize the pressure inflation puts on consumers and the potential for an economic slowdown, so far Constellation's fundamental business has held up well and continues to grow. And historically, alcohol sales have been relatively resilient during recessionary periods — a point we've been making since May in explaining our desire to own Constellation. However, we know the current operating environment also is chock full of uncertainty, and things can change quickly, which Wedbush acknowledged. That's why we were comfortable with the conservative profit guidance issued last week by management. "There's a lot of volatility still in the market," Constellation CEO Bill Newlands told Jim Cramer on Thursday . "Admittedly, we're being careful." We also agreed with Wedbush's outlook on the potential adjustment to Constellation's dual-class share structure. On May 5, when we took a stake in Constellation, we called out this dark governance cloud and said its elimination would likely assuage investor concerns over the founding Sands family's spotty record. "Capital allocation decisions have been an overhang on multiple expansion, though delivering on their shareholder return targets this year, and a potential reclass of its Class B shares should help to de-risk this issue going forward," Wedbush wrote. As it currently stands, the Sands family's super-voting Class B shares give them majority control. The company's board approved a plan in June to convert those Class B shares into Class A common stock, paying the Sands family a cash premium as part of the transaction valued at roughly $1.5 billion . Expense savings related to reclassification make the actual cost closer to $1 billion, management has argued, because under the proposal, Robert and Richard Sands would retire as executive chairman and executive vice chairman. Constellation said last week it has scheduled a special shareholder meeting Nov. 9 to vote on the proposal. (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.

Corona Extra beers arranged in the Brooklyn Borough of New York, U.S., on Tuesday, Nov. 23, 2021.

Gabby Jones | Bloomberg | Getty Images