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Morningstar | Constellation Brands' Portfolio of Premium Alcohol Brands Should Support Solid Top-Line Gains

Constellation Brands has experienced substantial growth over the past decade, and we expect its portfolio of premium beer, wine, and spirits brands will allow for further top-line expansion (our outlook calls for mid-single-digit compound sales growth over the next five years). With six of the top 15 imported beer brands in the U.S., Constellation maintains entrenched relationships with distributors and retailers that have relied on these brands to drive growth; volumes of imported and craft beers have averaged mid- to high-single-digit growth over the past three years, compared with flat volumes for beer overall. We surmise these relationships will prove valuable as the firm expands its distribution and seeks shelf space for new fare. A growing percentage of consumers who drink across the beer, wine, and spirits categories should also lift sales across the firm's portfolio, as we estimate these consumers spend roughly 6 times more than consumers who only drink in one category. Moreover, we think broader demographic trends in the United States--including a growing proportion of Hispanic (around 40% of the firm's consumer base) and millennial consumers (who we estimate are at least twice as likely to be weekly craft beer drinkers than other generations)--will be a boon to the company.Constellation Brands’ bottom line is well-positioned to benefit from these trends as well. Its beer segment operating margins have expanded over 7% since fiscal 2015 to nearly 40%, and we expect further improvement from operating leverage and strong capacity utilization. We also expect ongoing portfolio premiumization to boost profitability, following the acquisitions of higher-margin wine and spirit brands and divestitures of lower-priced wine brands in recent years (with the divestiture of a portion of its wine and spirits business for $1.7 billion expected to close in the first quarter of fiscal 2020), as these products are likely to resonate with consumers trading up to higher-end beverages. We anticipate that the firm will continue to reinvest part of these profits behind its brands, keeping its brand intangible assets intact.