If you last looked at the beer and wine industry a few years
ago, you may be surprised by how much has changed. Most notably,
a wave of mergers and acquisitions has produced a behemoth,
Anheuser Busch InBev (
) that dominates the market in Europe, the U.S. and Latin
America. The creation of such a monster has required a few
concessions, such as when AB InBev wanted to acquire Modelo, and
U.S. regulators insisted that some of Modelo's brands and one of
its breweries first be sold.
In stepped Constellation Brands (
), a distributer of wine, beer and one Canadian whisky.
Constellation bought the Modelo assets for $4.8 billion, which
now appears to have been a fire-sale price. The new assets are
already contributing to Constellation's bottom line as part of
their Crown Imports division, and their growth in 2013 has been
impressive. Corona, the flagship brand, is the best-selling
imported beer in the United States.
On Wednesday, January 8, Constellation Brands reported the
results of its 2014 fiscal third quarter. The company earned
$1.10 per share, blowing away the consensus estimate of $0.90.
Among the reasons for the earnings surprise were both a general
rise in alcohol consumption and a double-digit rise in sales from
Crown Imports, with Corona leading the way. It would seem that
investors should expect to see alcohol-related stocks doing well
this earnings season.
Americans are drinking less beer these days in relation to
wine, and American taste in beer is changing. This has led to a
shift away from many of the giants of the past and toward craft
beer, though the later term is without any fixed definition.
Industry upstart Boston Beer (
) grew at a fantastic 29% in 2013, though with the company's
current market cap of nearly $3 billion, one wonders if its
flagship Samuel Adams brand is really a craft beer at all
Corona, obviously does not meet
definition of craft beer, and yet Americans are buying it as if
that is what it were. The exact reasons for this are unclear, but
it may be sense of authenticity-unlike AB InBev, Constellation
has not produced fake craft beers, and that has been wise, since
the tactic doesn't work very well. Corona, generally served with
a slice of lemon or lime, is light, but it manages to avoid the
much deserved stigma of "light beer," which consumers have been
finding they have less and less of a taste for in recent years.
It may be that publicity surrounding AB InBev's Modelo
acquisition has given Corona a sort of "last man standing"
appeal, even though the AB InBev juggernaut still faces
competition from Miller Brewing Company and Molson Coors as
Whatever the reason, most of the dinosaur beers from two or
three decades back appear to be in their autumn years, but it is
a glorious summer day for Corona, and Constellation Brands is
betting heavily on the future of the franchise. If you haven't
already, get ready to start seeing Corona on tap at bars and
restaurants across America; Constellation brands is going to see
exactly how far it can push this "Corona as craft beer"
At its recent price of $80.00, STZ stock has an oddly low P/E
ratio of 8.51, and its 2014 profits, it is now estimated, will be
more than 50% greater than its 2013 profits.
We seek to capitalize on the high demand Constellation Brands
is currently seeing for its products with a bull-put credit
spread. Look at the April 67.5/70 bull-put spread for at least a
$0.25 credit. Use limit orders. This trade has a target return of
11.1% over 96 days. The stock has to fall 12.5% to cause a
problem. This is an aggressive trade, best suited to investors
with diverse portfolios and a high tolerance for risk.