Daily Stock Pick: October 21st, 2022

Stocks sank this morning, adding to yesterday’s losses as the market digested a slew of mixed corporate earnings from the past few days.  Despite yesterday’s downturn, the major indices are on track for a winning week.  As of Thursday’s close, the Dow was up 2.36%, the S&P 500 was up 2.31%, and the Nasdaq Composite was up 2.84%.  

Some may be trying to call a bottom for the market, but an increasing number of Wall Street pros predict the rout will continue in the face of looming recession concerns.  Many investors struggling to trust recent gains are seeking companies from defensive sectors with a reputation for being resilient during times of economic weakness.  

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.  Revenue was up 12% from the same period last year, 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.  Its current price of $222.53 indicates a P/E of around 20x. STZ seems undervalued compared to competitors like The Duckhorn Portfolio, Inc., with a P/E of 26x, and Brown-Forman Corporation, with a P/E of 34x.  Of 24 analysts offering recommendations for the stock, 18 rate it a Buy, and 6 rate it Hold.  There are no Sell ratings.  A median price target of $275.50 represents a 24% upside from the current price.  Investors in STZ also benefit from the company’s 1.44% quarterly dividend.