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Constellation Brands (STZ) to Gain From Corona Hard Seltzer

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Constellation Brands Inc. STZ is witnessing robust top and bottom-line trends on strong beer business and margins. Further, the company sees immense opportunities in the fast-growing hard seltzer category, which should help gain market share. Additionally, its commitment toward reviving its wine & spirits business should bolster performance.

Backed by the aforementioned positives, shares of the Zacks Rank #2 (Buy) company have gained 8.8% in the past three months compared with the industry’s 0.5% growth.



Opportunities in the Hard Seltzer Category

The beverage industry has transformed with the arrival of hard seltzers, which has taken the alcohol-drinking American population by storm. The exponential rise of these products resulted from growing health-consciousness among drinkers and demand for better, refreshing beverages that offer more variety in terms of taste.

Apparently, seltzers are stealing a large share from the beer, and wine & spirits categories, with a significant share sourced from the beer category. Total wine volume in the United States declined 0.9% year over year in 2019, marking the first decline in 25 years, according to market research firm IWSR. Beer volume in the United States slipped 2.3% in 2019, which was the fourth consecutive year of a decline.

Meanwhile, last year was remarkable for hard seltzer producers, after the beverage hit the $1-billion mark in annual sales. Per IWSR, hard seltzer volume in the United States was 82.5 million cases in 2019 and volumes are expected to more than triple by 2023 to 281 million cases.

Consequently, Constellation Brands is looking for opportunities in the hard seltzer category, with the planned launch of Corona hard seltzer in spring 2020. The company is spending more than $40 million for the launch, marking its biggest investment ever for a single brand. It plans to launch four flavors of the hard seltzer, namely tropical lime, mango, cherry and blackberry lime.

The company decided to name its hard seltzer brand after Corona due to the brand’s huge popularity with Hispanic and drinkers aged 21 to 54. Additionally, the refreshment characteristics of seltzers are a perfect match for Corona’s refreshment quotient.

Other Growth Fundamentals

Constellation Brands has been significantly gaining from strength in the beer business over the years, owing to rise in shipment volume and depletions. For fiscal 2020, management estimates 7-8% net sales growth for the beer segment, with operating income growth of 8-9%.

Furthermore, as part of its wine and spirits transformation strategy, the company has revised the terms of its original deal, pertaining to the divestiture of its certain wine and spirits business to E. & J. Gallo Winery. It excluded the sale of some brands from the transaction and reduced the deal value to $1.1 billion (from $1.7 billion mentioned earlier). The transaction is likely to close by end of fiscal 2020, after receiving regulatory approval.

In a separate but related deal, the company agreed to divest its New Zealand-based Nobilo Wine brand and related assets to E. & J. Gallo for $130 million. The transaction is expected to close in the first half of fiscal 2021, after receiving regulatory approvals. Gains from these transactions are now likely to result in an 8-10% decline in net sales and operating income for the wine and spirits business. Earlier, it anticipated a 15-20% decline in net sales for the wine & spirits business, with a 25% dip in operating income.

Additionally, the company’s consistent focus on brand building and initiatives to include new products are its key revenue drivers. Owing to its endeavors, it is gaining market share, especially in the U.S. beer category. Its innovations and marketing efforts are well-recognized in the beverage market. The company expects its strong innovation pipeline to drive growth in the years ahead. Furthermore, its premiumization strategy is gaining traction as its wine and spirits Power Brands (sold at price points of greater than $11) continue to outpace competitors in the high-end market.

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