Modelo maker Constellation Brands is primed for market share gains but we still see one issue with the company

Published Sun, Apr 7 202410:00 AM EDT

Constellation Brands stock is looking like it could be ready to break out, with its strong beer business well-positioned for market share gains in the upcoming fiscal year. "It's been a winner and I think it's going to stay a winner," Jim Cramer said. He highlighted the company's anticipated expansion of shelf space in supermarkets and convenience stores as a catalyst, particularly as competitors like Anheuser-Busch Inbev 's Bud Light face reductions. Constellation is behind the popular Modelo, Corona and Pacifico portfolio of Mexican beers. Jim's comments come on the back of a recent Morgan Stanley note, estimating strong long-term beer volume growth in the coming quarters that is "not priced into the valuation" of Constellation's stock. The analysts argue that this is, in part, due to the so-called shelf reset, which happens every spring. It's when major retail stores reallocate their shelf space to the brands that are performing best. Shelf space gains are likely "going to play out over the next couple of months and will take a little bit to show up in results," said Club portfolio director Jeff Marks. But some of that strength is already showing up in recent scanner data from Nielsen, which see beer sales up 11% during the four-week period ending March 23. "There's traditionally buying in the month of April for Cinco de Mayo," Jim said Tuesday. Morgan Stanley anticipates Constellation to continue gaining market share at the expense of Bud Light during this period. That would build on the momentum that pushed Modelo past Bud Light as the top-selling beer in 2023. Modelo's favorable distribution trends have a lot to do with the Bud Light boycott last year over a marketing campaign with a transgender influencer, which resulted in its loss of market share. Next Thursday, Constellation is set to report the final three months of its fiscal 2024, which ended in February. Morgan Stanley expects "relatively in-line" fiscal Q4 numbers due to poor weather in January and February impacting beer consumption. The analysts also see initially conservative full-year 2025 guidance, which would not surprise us. However, Morgan Stanley said that "rebounding volume momentum" in fiscal 2025 Q1 should continue to drive the stock higher. "We prefer volume-driven consumer product stories this year because companies can no longer solely rely on price increases to drive sales growth," Marks added. STZ 1Y mountain Constellation Brands 1 year Shares have gained 9.5% year to date, roughly in line with the S & P 500 's roughly 9.2% advance over the same stretch. The stock has done better than the consumer staples sector's 4 % increase so far this year. Constellation shares were about 3% away from their August all-time highs of $273.65 each. Piper Sandler, meanwhile, recently started coverage on Constellation with a buy-equivalent overweight rating and a $300-per-share price target. That PT represents a nearly 12% increase from current levels of around $266. While echoing distribution tailwinds, the Piper analysts also expect long-term sustainable U.S. share gains in beer helped by positive demographic trends. "With the Hispanic demographic in the U.S. rising, we expect Mexican beer imports to be long-term winners, which benefits STZ," the analysts wrote. Jim described the Piper note, which was out late last month, as "something to get ahead from an event that will make it so the stock goes much higher." Since Constellation tends to boast industry-leading results in its beer business, we're confident it will deliver strong numbers again next week. But we continue to be concerned about its wine and spirits segment, which has been a drag on the overall business for years. Jim has repeatedly said he would like to see the company sell the unit. During November's Investor Day, management forecasted a 1% to 2% drop in fiscal 2024 wine and spirits organic net sales. A month later, when the company reported its fiscal 2024 third quarter , management revised that guidance lower, calling for a 7% to 9% decline. At the time, Newlands put most of the blame on "broader marketplace deceleration," particularly the underperformance in wholesale channels. Over the past few years, Constellation has been trying to boost sales in its wine and spirits business — shifting from lower-priced brands to more premium names. The company still has some mainstream wine and spirits brands that it's working to revitalize. To be sure, the company has seen strength in its higher-end wines like Meiomi, Kim Crawford, and The Prisoner. But we just don't like the category, which includes High West bourbon and Svedka vodka. While wine and spirits make up a small part of Constellation's overall business, Jim has said it must go. "They have to get out of the clears and the browns," referring to liquor, given the potential overhang from GLP-1 weight loss drugs. We believe these treatments, including Club name Eli Lilly 's Zepbound, are more of an issue for hard alcohol than beer. We also take some comfort in the presence of activist investor group Elliott Investment Management, which should keep management accountable for decisions around capital allocation and business investments. Constellation management has agreed to work with Elliott, which had a 507,000 share stake, as of the end of 2023. At current stock prices, that would be worth nearly $1.36 billion. (Jim Cramer's Charitable Trust is long STZ, LLY. 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. 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Cans of Corona and Modelo beer are displayed on a shelf at a BevMo store on January 05, 2024 in San Rafael, California.

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