Key Points

  • Constellation Brands stock looks oversold after reporting solid earnings and positive forward guidance.
  • Beer sales drive the company’s growth and could reign as a solid, defensive choice for patient investors.
  • The company’s cannabis investment still weighs on the stock.

Investors looking to ride out the current bear market may want to look closely at Constellation Brands Inc Class A (NYSE:). The company reported on Oct. 5 and beat on both the top and bottom lines.

In the first two quarters of Constellation’s 2023 fiscal year, it has generated year-over-year (YOY) revenue 18% higher than the fiscal year 2022 and earnings 23% higher on a YOY basis.

As an investor in 2022, you know that the real story involves guidance. In an environment where many companies adjust their earnings estimates lower, Constellation Brands stock is guiding slightly higher. The company is projecting full-year earnings to range from $11.20 to $11.60. The low end of that range would be a 22% YOY increase.

Constellation Brands is also guiding full-year free cash flow (FCF) from $1.3 billion to $1.4 billion. That would be lower than the last three years but in line with its 2019 number, which may be a more accurate reflection of the business.

Beer Sales Remain Recession-Proof

Beer is still a staple even in periods of high inflation. What may be less obvious is that, for now, consumers are not trading down. Constellation reported that the company’s beer business remains the leading market share gainer in U.S. track channels. It makes up 28% of the high-end segment. Specifically, the company highlighted the strength of its Corona and Modelo Especial brands.

This is also carrying over to the company’s wine and spirits business. As noted on the company’s earnings call, Constellation has been taking steps to make this more of a direct-to-consumer (DTC) model, and it has made headway, with DTC net sales increasing by 15%.

How Should Investors View Constellation’s Cannabis Exposure?

One cautionary note for any investor looking to take or hold a position in STZ stock is the company’s ownership stake in Canopy Growth (NASDAQ:), which has been disappointing for the company and investors. That continued in this report in which the company took a $1 billion impairment charge.

However, the Constellation CEO points to statistics that suggest the U.S. legal cannabis market will reach approximately $50 billion by 2026, which would double the $25 billion the market represented in 2021.

That data is starting to look a little stale. Many steps will have to be taken for the cannabis market to hit that number. To be clear, legalizing recreational and medicinal cannabis in all 50 states is more of a question of when than if. But the mid-term elections will have a lot to say about the political will on this issue over the next two years at least.

A Defensive Stock for Defensive Times

If recent economic news indicates, every investor may be looking to have a drink or two to get through this bear market. And while that might not necessarily be the right reason to consider Constellation Brands for your portfolio, it may not be the wrong reason.

At times like these, playing defense can be the right move. Constellation has products that are still in demand. This will give the company pricing power and, more importantly, help prevent earnings erosion.

Plus, the stock looks a bit undervalued at the moment. Analysts surveyed by MarketBeat give STZ stock a consensus price target of $277.71. That’s a 23% increase from the current price. Reaction to the earnings report has been mixed, with some analysts raising price targets and others lowering them. But overall, the sentiment appears to be bullish.

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