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Constellation Brands and the health of its beer business - Analysis

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Constellation Brands' Mexican beer unit has proved to be a powerhouse for the company. Quarter after quarter, analysts have praised the performance of Corona and Modelo in the US as the company moved to buy and build new breweries to keep up with demand. 

Corona is made in Mexico

Corona is made in Mexico

Then, in November, Donald Trump won the US presidential race and the market (and the world) began to wonder if the president-elect would make good on promises to introduce a Mexican border tax, deport unauthorised immigrants and even build a wall between the US and Mexico. 

It wasn't entirely surprising yesterday, then, when analysts' notes following the company's third-quarter and year-to-date results flagged market consternation - Constellations's share price was down around 6% after the results announcement. 

"After two months of concern over political disruption, Constellation's shares were under significant pressure... as investor concern has now shifted to beer category health and Constellation's fundamentals," said Cowen & Co analyst Vivien Azer.

Digging into the numbers, SIG's Pablo Zuanic said beer depletions, up 10.7%, "are below the recent pace (2Q17 +13.8%) and below our estimate for the quarter of 13%". 

"Also, they were four points below what the scanner data had implied," he said.

While the third quarter only ran until the end of November, Azer said market concerns had been amplified by press reports citing Nielsen and soft December trends.  

But Constellation CEO Rob Sands played down the issues on the company's post-results conference call. 

"December continues to be strong," he said. "We don't pay that much attention to month-over-month fluctuations, but December continues to be strong results. Yes, we were up, what, 13% in IRI in December - very strong trends."

Societe Generale analyst Andrew Holland also highlighted that "the beer category as a whole was weak" in December. 

"The CEO pointed to tough comps - depletions in 3Q 2016 were +16.2%, and were still +10.7% in 3Q 2017," said Holland in a post-call note. "He cautioned against over-concluding from a single month's figures, and pointed to sequential growth in consumer take-away."

As we get closer to Trump's presidency, speculation will no doubt continue. In the meantime, Sands is looking forward to launching a new Corona.

Constellation Brands able to shrug off Trump border tax - analyst


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