Will This Company Be The Best Beverage Company of 2022

Last we wrote about Constellation Brands, the stock was trading near $200 and was flat on the year due to supply chain headwinds (see it here).

Just a few months ago we thought the supply chain issues were nearing an end and now today the supply chain issues have really started to dissipate. And the stock has responded by increasing roughly 25% to $250 a share over just a few months span.

But now with the stock up so much over the last few months, many of you have been asking us if we think the upside has been priced in or not.

The short answer is no and we still think there's a ton more room for the stock to grow! We believe Constellation Brands is a best in class beverage company and is still way undervalued.

Let's get into the details 👇 

Constellation Overview: 

Before we dive into Constellation Brands ($STZ), we just wanted to let you all know who they are in case you are unfamiliar with them. While the parent company is not a household name, many people should be familiar with their brands. They include:

• Beer: Corona, Modelo Especial, Negra Modelo, Pacífico, etc.
• Spirits: Svedka Vodka, Casa Noble Tequila, High West Whiskey, Nelson's Green Brier Tennessee Whiskey, etc.

They are the largest beer importer in the US and have the third-largest market share of all major beer suppliers globally. They also have large investments in medical and recreational cannabis.

Long story short, Constellation Brands is a powerhouse in the adult beverage and cannabis space.

Why We Love Constellation: 

So now that you know a little bit about Constellation here's 3 reasons why we still think that they're undervalued:

1. Demand for beer has compounded in 2021 and looks to continue so going forward. With beer comprising over 65% of their EBITDA, Constellation is in a good place to capitalize on the growing demand globally. And not only is this demand positive for their revenue growth (8%+ YoY growth for their beer products), but their EBITDA due to beer has also grown over 10% for the last 3 years and is expected to continue into 2022. When comparing this revenue and EBITDA growth relative to their peers, we see that these growth metrics far surpass most other beverage and other consumer products.

2. And not only is EBITDA and revenue growing, but their margins are growing as well -- even in the face of rising raw material costs. Pairing this with the fact that they've beaten margin expectations 7 out of the last 8 years --  this signals to us how efficient they've become at selling their product. As we've preached before, rising margins is a key for legacy businesses like Constellation. It shows that not only can they increase sales, but they can also increase money retained per good sold. This is a huge sign of success for companies like Constellation.

3. When you combine points 1 & 2 above you would think that their stock would be extremely expensive. But what we see is that not only is their financials better than their peers but their stock is also cheaper too! When looking at a handful of valuation metrics, we see that on a multiple standpoint, they're cheaper than companies like Pepsi, Coca-Cola, Monster, BFB, etc. And when looking at P/E specifically (see more on this here) and other value metrics, we see that their stock is over 30% cheaper compared to all of these companies. This really shows how undervalued the stock is and how much the market is missing the mark on constellation vs other companies in the beverage and CPG space.

What's Next For The Stock:

So while all of the historicals are solid, what's more important for the company is what is coming next. And as we mentioned above, we're expecting revenues, margins, EBITDA & profitability to increase sharply in 2022.

This outperformance should be directly attributed to the increase in growth in their beer portfolio because high end premium beer demand is growing like crazy -- and most of their portfolio is comprised of premium high end beer.

Additionally demand for alcoholic seltzer, which usually eats into demand for beer, has been decreasing sharply over the course of 2021. The CEO of Sam Adams said they literally threw away millions of cases of Truly because people just didn't want them anymore -- which again bodes very well for their beer portfolio.

When pairing all of this together with the fact that supply is picking back up (which should help beer revenues grow even further) we think the stock will not only outperform expectations but also outperform their peer group by a wide margin.

We therefore have and continue to love Constellation and think they should be a strong stock to invest in over the course of 2022!

Price Target: $305 (~22% increase)

Current Price: $250

Target Date: 6-9 Months

Dividend Yield: 1.2%

Market Cap: $47B

Rating: Overweight

Ticker: STZ