Beer Demand Slumps, Margins Squeezed: Why This Analyst Still Likes Constellation

Core Viewpoint - Needham analyst Gerald Pascarelli has reiterated a Buy rating on Constellation Brands, Inc. but has lowered the price forecast from $215 to $195, anticipating a weak start to fiscal year 2026 with first-quarter results expected on July 1 [1][3]. Group 1: Financial Performance Expectations - Pascarelli predicts that Constellation Brands will report beer revenue and margins below the lower end of full-year guidance, which may negatively impact Street estimates [1]. - The analyst has reduced his first-quarter earnings per share (EPS) estimate to $3.20, and lowered fiscal year 2026 and fiscal year 2027 EPS estimates to $12.64 and $13.76, respectively [3][5]. - The price forecast of $195 implies a ~20% discount to the company's historical average multiple of ~14x [3]. Group 2: Market Trends and Challenges - Over the past three months, beer volumes have declined sequentially, with a forecasted beer depletion of -3.0%, which is 120 basis points below the -1.8% consensus [2][4]. - Volume trends have weakened since February due to category softness, ongoing consumer challenges, and poor weather in May and early June [3]. - Increased investment spending, particularly in marketing (estimated at 9.5% of sales), along with volume pressure, contributes to a forecasted beer margin of 38.0%, notably below the Street's 39.8% [4]. Group 3: Segment Performance and Guidance - Pascarelli is 10 points below consensus on wine and spirits revenue, expecting a ~30% organic decline, with the Svedka divestiture contributing to a ~5-point hit [5]. - The analyst models a 70% drop in segment operating income due to volume deleverage and distributor repayments [5]. - Despite a weak start to fiscal year 2026, the initial beer guidance was conservative enough to allow the company to meet its full-year targets, with management typically avoiding guidance revisions in the first quarter [6].