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Constellation Brands' beer boom, second brewery in the pipeline - Analysis

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Constellation Brands' beer business seems to have given analysts plenty of reasons to be cheerful, following the company’s first-half results, released yesterday.

Corona helps drive growth at Constellation Brands

Corona helps drive growth at Constellation Brands

In a conference call following the release of the numbers, group CEO Rob Sands hinted at the construction of a second brewery in Mexico, following the expansion of its Nava brewery's annual capacity from 20m hectolitres to 25m - scheduled to be completed by the end of 2017. Plans for a second brewery - likely to be a greenfield site in western Mexico - could be announced in the third quarter earnings call in January, Sands said.

“Given the continued strength of our beer business," Sands said, "we continue to make progress in evaluating plans for our future capacity needs beyond 25m hectolitres (per year).”

Chief financial officer David Klein said the location of the new site hadn’t yet been decided. “Based upon our volume growth numbers that we demonstrated this quarter and for the last while," he said, "we will be spending the capital on a greenfield sooner than later, because it’s going to take four years to build out another brewery and, with these kind of growth rates, we will need to keep up with capacity.”

The site is likely to cost US$100-150 per hectolitre and take four years to construct, according to a note from CLSA analyst Caroline Levy. 

Stifel analyst Mark Swartzberg said of the project: "We continue to estimate $1.25bn in capital spending for this, starting in fiscal-2017 [from March next year]."

Speaking more broadly about beer at Constellation, Nomura analyst Edward Mundy described the category as “the key driver of earnings growth” for the company, pointing out that it generates 60% of Constellation’s profits. “The company’s key beer brands are enjoying both power and momentum. US imports is a scalable sub-segment (the same size as the South Africa or Vietnam beer markets) with attractive volume growth and pricing characteristics.”

Meanwhile, CLSA's Levy said she remains encouraged by "strong momentum" for Modelo Especial as well as Corona, which has been boosted by the can format.

"In an environment where there is shrinking demand for big brands," Levy says, "what makes (Constellation) unique is its beer management's ability to present Corona & Modelo Especial as authentic and on-trend beers". She outlined both distribution and packaging opportunities, saying that cans, which make up 6% of Corona's sales, "could grow to 20%".


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