Goldman says buy beer powerhouse Constellation. One of its reasons made us think

Published Fri, Dec 1 20232:59 PM EST

Goldman Sachs believes Constellation Brands (STZ) has the potential to revive sales in its struggling Wine & Spirits division. It's not impossible, but we're more bullish on the company's core beer business. Constellation Brands on Friday was added to Goldman Sachs' conviction buy list. Analyst Bonnie Herzog cites the company's growing market share in beer and sees stabilization ahead in lagging wine and spirits. Goldman has a $290-per-share price target on the stock. Constellation is known for its best-selling premium Mexican beer brands: Modelo, Corona and Pacifico. While it also has a decent line-up of wine and spirits — such as Simi wines and Svedka vodka — the segment has been under pressure as management tries to shift the portfolio to premium selections. In the Goldman note, Herzog acknowledged that Wine & Spirits has, indeed, struggled. At the same time, she believes that part of the business can "stabilize … or at least stop being a drag." The analyst sees growth opportunities in direct-to-consumer sales and international expansion, as well as ways to develop "more efficient marketing to create a better base of business going forward." Similar to the Club's base case, Herzog believes Constellation is "poised to continue to gain market share in the U.S. beer market as it expands distribution in the middle of the country from its coastal strongholds." Management's emphasis on "driving shareholder returns reduces the risk of its underperforming Wine business," she added. During its fiscal 2024 second quarter — released on Oct. 5 — Wine & Spirits sales fell 11% year-over-year organically to $444 million, while the segment's operating margin contracted to 18.2%. In our view, the quarter's weak Wine & Spirits performance strengthened the case to divest the division — so the company could use the cash to buy back more stock or possibly invest more in its stellar beer business. Overall, fiscal Q2 was strong with revenue and profit beats and rosier full-year guidance. On earnings day, Constellation dropped more than 3% to $241 each. At the time, we thought the decline was unwarranted, and we upgraded the stock back to our buy-equivalent 1 rating . STZ 1Y mountain STZ 1-year stock performance. Less than a month later, Constellation held its Investor Day on Nov. 2. We had been hoping to hear news about a breakup of its underperforming Wine & Spirits, which did not happen. However, Constellation management did discuss at the event sequential improvement in sales and profitability in the segment, as well as a continued focus on beer and consistent capital returns through a $2 billion buyback. Despite the positives, "the stock has done nothing" since earnings, Jim Cramer said Friday. Constellation shares have been bouncing around a bit but have not made any sort of a breakout. The stock has gained nearly 4% year-to-date but has dropped 6.5% over the past 12 months. Still, we see opportunities for the company to grow because the fundamentals of the business are intact, which should translate to a higher stock price in the future. (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.

Workers load bottles of alcohol into boxes at Southern Glazer's Wine and Spirits LLC distribution center in Louisville, Kentucky, on Monday, June 28, 2021.

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