Daily Stock Pick: December 7th, 2022

Stocks ticked lower this morning, adding to yesterday’s losses as concerns intensified about the state of the economy and the likelihood of a downturn next year. “All told, financial indicators point to a recession on the horizon,” wrote Wells Fargo’s Azhar Iqbal in a note to clients. “The S&P 500 has peaked ahead of recessions with an average lead time of four months over the past few business cycles. Taken together with the inverted yield curve, markets are clearly braced for a recession in 2023.”  

With optimism fading that the Fed will be able to engineer a “soft landing” that avoids a recession, many investors are looking for stocks that will likely hold up well during a recession. Today we’re highlighting a company with a decades-long history as an indispensable household name that’s been quietly diversifying, expanding, and increasing its efficiency. Moreover, the stock is currently trading at a value compared to peers. Investors in this stock can also look forward to a unique set of tailwinds as recession sets in.  

Data suggests that alcohol consumption increases during recessionary periods. One study revealed that in the 2008 recession, total alcohol consumption increased even as the number of people completely abstaining from alcohol increased. In other words, drinkers tend to drink much more in an economic downturn.

Beer, wine, and spirits distributor and manufacturer Constellation Brands (STZ) has over 100 brands, including Corona, Modelo, Svedka Vodka, Casa Noble Tequila, and Robert Mondavi.   Its robust portfolio of high-quality brands also provides investors with exposure to the cannabis industry via its Canopy Growth (CGC) investment.

As the most prominent beer import company in the US, Constellation has the third highest market share (7.4%) of all major beer suppliers and generates 77% of its consolidated net sales through beer. The company has increased its production capacity four times over the last decade to meet demand and is currently focused on projects in Mexico. With $800 million invested in Mexican Beer Projects in 2022 and renewed support from the Mexican government (via a recent commitment to continued access to government-owned water sources), the expansion is likely to be highly successful.    

Constellation topped Wall Street’s expectations for both earnings and revenue during its most recent release. The company reported $3.17 per share compared to analyst expectations of $2.88 per share. Last year, revenue was up 12% from the same period, coming in at $2.66 billion, beating the consensus estimate of $2.51 billion. 

Equities research analysts predict that Constellation Brands will post $10.91 earnings per share for 2022. At its current price of $242.73, this indicates a P/E of 25x STZ seems undervalued compared to competitors like The Duckhorn Portfolio, Inc. (NAPA) with a P/E of 30x and Brown-Forman Corporation (BF.B) with a P/E of 38x. Of 26 analysts offering recommendations for the stock, 21 rate it a Buy, and 5 rate it Hold. There are no Sell ratings. A median price target of $280 represents a 13% upside from the current price.