Constellation Brands: Strong Brands, Strong Future

Constellation Brands is a major player in the global beverage alcohol industry, offering a premium portfolio that includes beer, wine, and spirits. With well-known brands like Modelo Especial, Corona, and Robert Mondavi, the company combines strong brand loyalty with strategic innovation and focused portfolio management. Having delivered consistent growth, high margins, and expanding market share, Constellation Brands is positioned to adapt to changing consumer preferences and market challenges. The question is: Does this premium alcohol company deserve a place in your investment portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Constellation Brands at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Constellation Brands, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Constellation Brands is a leading producer and marketer of alcoholic beverages with a primary focus on the U.S. market. The company operates across beer, wine, and spirits, and has built a portfolio of well-known, high-quality brands that resonate strongly with consumers. In the beer segment, Constellation Brands is the second-largest beer company in the U.S. overall, and it leads the market in high-end and imported beers. It holds exclusive rights to sell and market Mexican brands such as Modelo Especial, Corona Extra, Pacifico, and Victoria. Modelo Especial is the best-selling beer in the U.S. by dollar sales. In wine and spirits, Constellation has strategically repositioned its portfolio toward higher-end brands, including Robert Mondavi Winery, Kim Crawford, The Prisoner Wine Company, High West whiskey, and Casa Noble tequila. The company has divested lower-margin brands and is expanding its presence in direct-to-consumer, eCommerce, and select international markets. Constellation’s strategy is built around understanding what consumers want and focusing on higher-quality, more premium products. The company invests significantly in expanding its production facilities, particularly in Mexico, to meet growing demand. It is also modernizing its operations through a multi-year digital upgrade to improve how it manages its supply chain, purchasing, and use of data. Its beer brands continue to gain market share, showing how strong and well-managed its brands are. The company enjoys a competitive moat supported by powerful brand loyalty, leadership in high-end beer, and an extensive distribution network that ensures visibility and availability across retail and on-premise locations. Its scale allows for cost advantages in marketing and production, while its innovation capabilities help it stay ahead of consumer trends through new flavor variants and formats. Constellation’s focused portfolio and disciplined capital deployment underpin its ability to grow profitably and consistently outperform peers in the U.S. alcohol market.

Management

Bill Newlands serves as the CEO of Constellation Brands, a role he assumed in 2019 after joining the company in 2015. He brings more than three decades of experience in the beverage alcohol industry, with a strong background in driving brand growth, portfolio transformation, and premiumization strategies. Prior to joining Constellation Brands, Bill Newlands held senior leadership positions across multiple companies in the wine and spirits space, including as President of North America at Beam Inc., where he played a key role in accelerating the company’s growth and enhancing its market positioning in the premium spirits segment. Since becoming CEO, Bill Newlands has led Constellation Brands through a focused strategic shift toward high-end, high-margin categories, including Mexican beer imports and premium wine and spirits. Under his leadership, the company has divested lower-performing mainstream wine labels and reinvested in its most valuable assets, including expanding brewery capacity in Mexico, launching new product innovations, and advancing its digital and omni-channel capabilities. His approach has aligned closely with long-term consumer trends favoring premiumization and betterment, helping to position Constellation Brands as one of the fastest-growing consumer packaged goods companies in the United States. Bill Newlands holds a Bachelor of Science from the Wharton School at the University of Pennsylvania and an MBA from Harvard Business School. He currently serves on the boards of Hormel Foods and the Distilled Spirits Council of the United States. He is well liked by employees, as shown by his high Glassdoor approval rating, and has earned respect from analysts for his focus on smart capital allocation and creating value for shareholders. While there isn’t much public detail about his leadership style, his track record of delivering results and building strong brands has made him a trusted figure in the industry. Given his experience and strong track record,  I believe Bill Newlands is well-positioned to lead Constellation Brands through its next phase.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Constellation Brands has managed to achieve a ROIC above 10% in seven out of the past ten years. It has increased its ROIC every year for the past five years, with four of those years delivering a ROIC above 10 percent. There are several reasons why ROIC has improved over the past four years. By focusing on high-end, high-margin beer, wine, and spirits, the company benefits from strong pricing power and higher profitability per dollar of sales. Because Constellation Brands is such a large company, it can produce, source, and market its products at a lower cost per unit, especially in its large breweries in Mexico. This helps keep costs down while maintaining strong profit margins. The company also allocates capital carefully, directing it toward areas that support long-term growth, such as expanding beer production, upgrading digital systems, and strengthening its premium brands. At the same time, it has sold off businesses that no longer fit its strategy, which helps maintain high returns. In addition, Constellation continues to launch new drinks that align with consumer trends and expand its reach through direct-to-consumer sales, eCommerce, and international markets. These efforts have made recent investments especially profitable, often delivering strong returns within the first year. As a result, Constellation Brands achieved its highest ROIC in the past decade in fiscal year 2025, which bodes well for the future.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Constellation Brands has had years where equity increased and years where it decreased. One reason equity has changed from year to year is because of business sales. For example, Constellation has sold off many of its lower-priced wine and spirits brands in recent years to focus on premium products. While these sales brought in cash, they also removed assets from the balance sheet, which can reduce equity. The main reason equity dropped sharply in fiscal year 2025 was a large write-down of value in its wine and spirits business through goodwill impairment. Basically, the company had to lower the accounting value of some past acquisitions because those brands were no longer expected to perform as well as originally hoped. This non-cash charge, meaning it did not involve actual money leaving the company, still reduced reported profits and directly lowered equity.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share.  Constellation Brands has consistently delivered positive free cash flow every year for the past decade, which is not surprising given its strong brand portfolio and market presence. In fiscal year 2025, free cash flow reached its second-highest level ever and the highest since 2021. This strong result came from several factors. First, the company brought in more cash from its day-to-day business, thanks to higher profits and better handling of things like inventory and payments. Second, it kept capital spending under control while still investing in important areas like expanding beer production. Third, as the company sold more products, its fixed costs such as factories and equipment did not increase at the same pace. That made each product cheaper to produce, which helped raise profits. The company also reduced costs in areas like shipping and marketing and continued to benefit from charging premium prices for its most popular brands. Constellation Brands has consistently achieved a high free cash flow margin because of its strong pricing power, focus on premium products, and disciplined cost structure. Selling high-margin beer and spirits allows the company to earn more profit on each dollar of sales, which supports strong cash generation. Unlike companies that rely on selling large volumes of low-margin products, Constellation can maintain profitability even with moderate growth. In addition, the company keeps its operating costs and capital spending under control, which means more of its earnings are converted into free cash flow. Its scale in production and distribution also helps lower per-unit costs, further supporting margins. This combination of premium pricing, efficient operations, and careful investment has allowed Constellation to consistently turn a large portion of its revenue into free cash flow over time. The company uses this free cash flow to fund both dividends and share buybacks. It plans to maintain its approximately 30 percent dividend payout ratio in the future, which means investors can expect growing dividends as free cash flow increases. Management has also stated that they view the share price as undervalued, suggesting that further share reductions can be expected. The free cash flow yield is currently at its highest level in more than a decade, indicating that the shares may be trading at an attractive valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a 3-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Constellation Brands reported a negative EPS of –$0,45 for fiscal year 2025. This loss was not because the company’s core business performed poorly, but mainly due to a large non-cash accounting charge of about $3,3 billion. This charge came from lowering the value of some wine and spirits brands the company had acquired in the past. While no money actually left the business, the adjustment still reduced reported profits and pushed EPS into negative territory for the year. If it wasn't for the accounting charge, EPS would have been $13,78. Hence, we use the adjusted earnings of $13,78 when calculating the debt to earnings ratio. When doing so, it shows that Constellation Brands has 3,7 years of earnings in debt, which is slightly above the three-year threshold. However, debt is not a concern. Management has stated that they aim to keep debt at around three times annual cash flow, which they believe is appropriate for the business. Thanks to the company’s strong cash generation, they have the flexibility to reassess this target each year and adjust if needed. If they decide it's better to reduce debt, they can do so. And if they see the stock as undervalued, they may temporarily take on more debt to buy back shares.

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Risks

Competition is a risk for Constellation Brands. The company operates in a highly competitive and fast-changing industry where it faces pressure from global beverage giants, regional producers, and fast-growing newcomers. Constellation competes not only with other alcoholic beverage companies, such as Anheuser-Busch InBev, Heineken, Diageo, and Gallo, but also with non-alcoholic beverage makers entering the alcohol space, including companies like Coca-Cola and PepsiCo. Many of these competitors have greater financial resources, more established global distribution networks, and larger marketing budgets. This makes it more difficult for Constellation to secure prime shelf space in retail stores, gain visibility in restaurants and bars, and maintain pricing power, especially in price-sensitive or highly saturated markets. The battle for consumer attention is intense, and success often depends on securing the right partnerships with wholesalers and retailers. Larger competitors can offer better terms or incentives, which may lead wholesalers or retailers to favor their products over Constellation's. This is particularly important in a three-tier distribution system like the one in the U.S., where access to shelf space and visibility is critical for sales. The company also faces increasing competition from emerging segments like ready-to-drink cocktails, hard seltzers, and cannabis-infused beverages. These categories are attracting younger consumers and reshaping traditional definitions of beer, wine, and spirits. Many of these products are produced by companies with no legacy presence in alcohol but with strong consumer brands and established distribution in adjacent categories. Finally, the rise of small-scale, local, and craft brands has introduced another layer of competition, particularly in the premium segment where Constellation is increasingly focused. These artisanal producers often appeal to consumers seeking authenticity, novelty, and a sense of connection to the product’s origin.

Macroeconomics is a risk for Constellation Brands. The company’s performance is closely tied to broader economic conditions and consumer confidence, particularly among the Hispanic population, which makes up roughly 50 percent of its beer business and over half of the Modelo brand’s consumer base. In fiscal year 2025, management noted that consumer demand had softened, largely due to non-structural socioeconomic factors such as inflation, job uncertainty, immigration concerns, and the rising cost of living. These concerns have led many Hispanic consumers to cut back on spending, especially on social activities like dining out and hosting gatherings, occasions that typically drive beer consumption. While beer is not the first category to be affected, it is still being impacted as consumers become more cautious. Beyond the Hispanic demographic, overall consumer sentiment has weakened. Disposable income reached a two-year low, and consumer confidence hit a 2,5-year low in early 2025. While unemployment has stabilized, there has been weakness in lower-income job sectors that tend to influence beer demand. Additionally, expectations for inflation and economic growth have become more muted, with no material improvement expected through the rest of the fiscal year. Constellation Brands sees this shift in consumer behavior as the biggest near-term risk. Management emphasized that it is difficult to predict when consumers will feel more confident and return to normal spending patterns. Until then, weaker consumer sentiment, especially in key demographic groups, may continue to weigh on demand.

Shifting consumer trends are a risk for Constellation Brands, as evolving behaviors and preferences are beginning to reshape alcohol consumption across key demographics, especially among younger generations. While Constellation has long benefited from strong brand recognition and a focus on premium beer, wine, and spirits, its long-term growth may be challenged by a structural decline in traditional alcohol consumption patterns. One of the most significant emerging trends is the growing focus on health and wellness, particularly among Gen Z and younger millennials. These consumers are drinking less alcohol than previous generations and increasingly favor low-alcohol, alcohol-free, or functional beverages that offer perceived health benefits. This generational shift is not just cyclical but cultural and could result in long-term declines in alcohol volumes unless brands adapt their portfolios and messaging to align with new values. Social trends like the rise of sober curiosity, alcohol-free social events, and wellness-focused lifestyles are all contributing to a more selective and moderate drinking culture. Another potential disruptor is the increasing use of GLP-1 drugs such as Ozempic and Wegovy, which were originally developed to treat diabetes and obesity but are now being widely used for weight loss. These drugs work by altering brain signals related to appetite and reward, and early studies suggest they may also reduce cravings for alcohol. While current data shows that alcohol is not the top category affected by GLP-1 usage, these drugs could become a more material headwind over time, particularly as more user-friendly oral versions and next-generation treatments become available. If consumers remain on these medications longer, it could gradually dampen alcohol consumption across a broad portion of the population.

Reasons to invest

Constellation Brands’ beer segment is one of the strongest reasons to invest in the company. It has delivered 15 consecutive years of volume growth and maintains margins of 39 to 40 percent, which are among the highest not only in the beer industry but across the broader consumer packaged goods space. A major driver of this success is Modelo Especial, which is the number one beer brand in the United States by dollar sales and the top dollar share gainer across all of beverage alcohol. Constellation holds six of the top fifteen share-gaining beer brands, including Corona Extra and Pacifico, both of which continue to grow in popularity. Pacifico, which began as a regional brand in California, is now experiencing double-digit growth and expanding nationally. It has shown early signs of following a similar growth trajectory to Modelo, which management refers to as a "Baby Modelo." Brand strength plays a key role in the performance of the beer segment. Consumer research shows that Modelo, Corona, and Pacifico are all holding strong or improving in metrics such as aided awareness, favorability, and brand love. These results apply across a broad range of consumers, including Gen Z and the Hispanic community. The company has also been expanding its marketing reach beyond the Hispanic demographic, which now makes up about 55 percent of Modelo’s base, down from 80 percent several years ago. This shift opens up additional growth opportunities in the general market, particularly in regions where shelf space is still underdeveloped. Shelf space is still a big growth opportunity for Constellation Brands. Even though Modelo is the top-selling beer by dollar sales, it does not yet have as much space on store shelves as some rivals like Bud Light. So far, efforts to improve visibility have already led to strong market share gains, and management believes there is still more room to grow.

Portfolio optimization in wine and spirits is a reason to invest in Constellation Brands because the company has made deliberate, long-term moves to reshape this part of its business around higher-growth, higher-margin opportunities. In 2025, it announced the sale of most of its remaining mainstream wine brands, choosing to retain only those that are priced $15 and above and aligned with premium consumer preferences. This shift brings the wine and spirits division in line with the company's strategy in beer, focusing on premium products where brand strength, pricing power, and profitability are greater. The remaining portfolio now includes well-known, high-end brands like Robert Mondavi Winery, The Prisoner Wine Company, and Kim Crawford, as well as award-winning craft spirits such as High West whiskey and Casa Noble tequila. These products cater to consumers who are trading up and are more loyal and less price-sensitive, providing a more stable foundation for growth. On top of this, Constellation expects more than $200 million in annual cost savings by fiscal year 2028 due to organizational restructuring tied to the portfolio change. This creates the potential for stronger margins and more efficient operations over time. The company is already seeing encouraging results: in the last quarter of fiscal 2025, sales from the remaining wine and spirits brands grew by 4 percent, showing better momentum than the overall category. This early performance supports the decision to focus on a smaller, more premium set of products. Altogether, this focused approach - streamlining the portfolio, reducing exposure to slower-growing segments, and doubling down on premium brands - positions Constellation to grow more profitably in a segment that was previously a drag on performance.

Innovation is a compelling reason to invest in Constellation Brands because the company has built a strong track record of creating and scaling products that align with evolving consumer tastes. Roughly 30 percent of its growth over the past five years has come from innovation, driven by a combination of in-house product development, strategic investments, and targeted acquisitions. The company’s approach is centered on consumer insights - identifying emerging trends, like health consciousness, convenience, and flavor exploration, and then developing products that meet those needs. Recent examples include Corona Sunbrew, a citrus-infused beer inspired by Gen Z’s social media trends, and Corona Non-Alc, which taps into the rising demand for moderation-friendly beverages. Despite minimal marketing, Corona Non-Alc saw sales nearly double in its second year, showing the underlying strength of the brand and demand. Constellation has also introduced innovations like Modelo Spiked Aguas Frescas and Cheladas to broaden its reach and capture new consumption occasions. In addition to new product development, Constellation is refining its packaging strategy to make products more accessible across income levels. Smaller-format options like 7-ounce and 8-ounce cans allow consumers to engage with familiar brands at lower price points, a tactic that helps maintain sales even when budgets are tight. What makes Constellation Brands stand out is how focused and efficient its innovation efforts are. While many competitors manage thousands of different products, Constellation keeps its portfolio tight with only about 160. This smaller, faster-moving lineup makes it easier for retailers and distributors to work with and helps ensure strong sales for each item. By staying disciplined and starting with what consumers want, the company continues to grow while also building strong partnerships across the supply chain. This approach helps Constellation keep launching successful new products and stay competitive over the long term.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 13,78 which is the adjusted EPS from fiscal 2025. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 7% in the next five years. Additionally, I have chosen a projected future P/E ratio of 14, which is twice the growth rate. This decision is based on the fact that Constellation Brands has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $93,81. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Constellation Brands at a price of $46,90 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 3.152 and capital expenditures were 1.214. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 850 in our calculations. The tax provision was -52. We have 180,7 outstanding shares. Hence, the calculation will be as follows: (3.152 – 850 - 52 / 180,7 x 10 = $124,52 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Constellation Brands' Free Cash Flow Per Share at $10,73 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $107,19.

Conclusion

I believe that Constellation Brands is an intriguing company with great management. The company has built a moat through its powerful brand loyalty, leadership in high-end beer, and an extensive distribution network. It has achieved a high ROIC in most years and has managed to increase its ROIC every year for the past five years, which is a positive trend that bodes well for the future. The company recently posted its second-highest free cash flow ever and has consistently delivered strong levered free cash flow. Competition is a risk for Constellation Brands because it operates in a crowded and evolving industry, facing pressure from global alcohol giants, non-alcoholic beverage companies entering the space, and fast-growing craft and niche brands. These rivals often have larger marketing budgets and stronger distribution networks, making it harder for Constellation to secure shelf space, maintain visibility, and protect its pricing power. Macroeconomics is another risk as the company’s sales, especially in beer, are sensitive to shifts in consumer confidence and spending, particularly among Hispanic consumers who represent about half of its beer business. Economic pressures like inflation, job concerns, and immigration issues have led to reduced social gatherings and restaurant visits, key occasions for beer consumption, and management views continued weak consumer sentiment as the biggest near-term challenge. Shifting consumer trends also pose a risk, as younger generations increasingly prioritize health and wellness, leading to reduced alcohol consumption and growing demand for low- or no-alcohol alternatives. Additionally, the rising use of GLP-1 drugs, which may lower alcohol cravings, could further dampen long-term demand, challenging the company’s traditional growth model. On the positive side, Constellation Brands’ beer segment is a key investment driver, supported by 15 years of volume growth and industry-leading margins of 39 to 40 percent. Flagship brands like Modelo, Corona, and Pacifico continue to gain share and expand their reach, with strong brand loyalty, rising national awareness, and untapped shelf space providing additional room for growth. Portfolio optimization in wine and spirits is another reason to invest, as the company is focusing on higher-margin, premium brands that align with consumer preferences for quality and exclusivity. By divesting mainstream wines and restructuring operations to achieve significant cost savings, Constellation is positioning this segment for stronger margins, more efficient growth, and improved performance. Innovation is also a key strength, as the company consistently develops products that match changing consumer preferences, contributing to about 30 percent of its growth over the past five years. With a focused portfolio of around 160 products, Constellation efficiently brings new offerings like Corona Sunbrew and Corona Non-Alc to market, while adapting packaging and pricing to reach a wide range of consumers. Overall, I believe there are many positive aspects to Constellation Brands, but I think there are better opportunities elsewhere, so I will not be investing in Constellation Brands at this time.

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