Using options to trade this beaten-down beer giant that Warren Buffett holds

CNBC

a day ago

Constellation Brands , a leading player in the beverage alcohol industry, has faced significant headwinds in 2025 analyst downgrades and broader market concerns about trends in alcohol consumption. However, the current pessimism surrounding the stock appears overdone, possibly presenting a compelling valuation even as many stocks, net of the S & P 500's rally this past week to new all-time highs, are beginning to look stretched. With a diversified portfolio, a focus on premium segments and notable investment from Berkshire Hathaway, STZ may be poised for a rebound. STZ YTD mountain STZ year to date Recent narratives surrounding declining alcohol consumption, driven by health-conscious younger generations and regulatory pressures, have painted a grim picture for the beverage alcohol industry. Reports highlight a global shift toward moderation, with no- and low-alcohol (no/low) beverages projected to grow at a +7% CAGR from 2024 to 2028. However, the decline in traditional alcohol consumption may be exaggerated. Constellation Brands is well-positioned to navigate this landscape. Its beer portfolio, including powerhouse brands like Modelo and Corona, aligns with the +2% volume growth in premium beer observed in 2024. These brands cater to consumers seeking affordable premium experiences, a segment less affected by moderation trends. Additionally, Constellation's strategic investments in no- or low-alcohol beverages, such as TÖST, and ready-to-drink (RTD) cocktails, like Fresca Mixed with Coca-Cola, tap into the +3% CAGR RTD market. These moves demonstrate Constellation's ability to adapt to evolving preferences while maintaining relevance across both traditional and emerging categories. I sense that the "funeral dirge" for alcohol may be premature. Cannabis has been touted as a healthier and more cost-effective alternative to alcohol, with some investors betting it could erode alcohol market share. But recent research has tempered this enthusiasm by highlighting significant health risks associated with cannabis use. Studies, such as those cited in 2024 medical journals, link cannabis to increased risks of cardiovascular issues, mental health disorders and impaired cognitive function, particularly with heavy or chronic use. These findings have sparked regulatory scrutiny and dampened consumer perceptions of cannabis as a "safe" alternative. For Constellation Brands, the waning cannabis narrative is a net positive. While the company holds a stake in Canopy Growth, a cannabis producer, this investment is a small fraction of its portfolio and serves as a hedge rather than a core focus. Constellation's primary strength lies in its beverage alcohol business, which benefits from cannabis's reduced competitive threat. As health concerns erode cannabis's appeal, consumers may gravitate back to alcohol, particularly premium beer and RTDs, where STZ excel. The company's $1.2 billion investment in Mexican production capacity in 2024 underscores its confidence in sustained demand for its beer brands, further insulating it from disruptions related to cannabis. The rise of anti-obesity medications, such as GLP-1 receptor has raised concerns about their impact on alcohol consumption. Studies have shown that these drugs reduce alcohol cravings and consumption, particularly among heavy drinkers and those with obesity, with some participants cutting intake by up to 70%. This trend aligns with the broader moderation movement, posing a potential risk to alcohol companies. However, Constellation Brands is strategically positioned to mitigate this threat. The company has shifted its focus to premium and upmarket segments, which are less affected by the consumption patterns of heavy drinkers targeted by obesity drugs. Premium beer, high-end wines, and RTD cocktails cater to affluent, health-conscious consumers who prioritize quality over quantity. These segments boast higher margins, enhancing STZ's profitability even if overall volume growth slows. For example, Constellation's beer segment continues to outperform, with Modelo and Corona driving market share gains. Additionally, its no/low-alcohol offerings and RTDs appeal to consumers influenced by health trends, ensuring relevance in a market shaped by obesity drugs. While these medications may curb overindulgence, STZ's premium focus and diversified portfolio provide a buffer against significant disruption. STZ trades at a price-to-sales (P/S) ratio of approximately 3.5, below the industry average of 4.2 for beverage alcohol companies. Its free cash flow yield of almost 6.7% is roughly 110 basis points higher than the industry average of ~5.6%, and considerably better than the broad market averages. This undervaluation has not gone unnoticed by savvy investors, such as the Oracle of Omaha. Berkshire Hathaway has maintained a significant stake in Constellation Brands, a rare move given the conglomerate's reluctance to deploy its cash hoard in recent years. Berkshire's investment signals confidence in STZ's long-term prospects, underpinned by its strong brand portfolio, operational efficiency, and ability to generate consistent free cash flow. Buffett's value-oriented approach aligns with STZ's current metrics, suggesting that the stock is poised for appreciation as market sentiment shifts. While the case for STZ is strong, investors should be aware that declining sales trends are real. Competitor Brown-Forman, which had already fallen more than 50% from its late 2020 highs ahead of its most recent quarterly earnings release, fell another 20% as sales dropped even more than anticipated. Economic uncertainty and consumers crimped by inflation could continue to pressure discretionary spending, including alcohol sales. The recent closing on the sale of their lower tier wine brands to Wine Group reduces their exposure as brands like Woodbridge, Robert Mondavi Private Selection and Meiomi appeared to a lower-end demographic relative to some of the notable brands they kept such as Prisoner, Mt. Veeder and Robert Mondavi Winery which is distinct from the "private selection" brand they sold. However, wine and spirit sales represent less than 20% of the firm's total revenues, which does illustrate their strategic approach. Many analysts have recently lowered their estimates and price targets. Consensus forecasts indicate that net revenue is likely to decline by a mid-single-digit percentage—the current multiple already incorporates a significant amount of bad news. At Friday's closing price of $161.33, Constellation traded at just 12.7x FY adjusted earnings estimates, and just 11.7x FY2027 adjusted earnings estimates of $13.78 per share. The trade Consequently, it may make sense to begin following Warren Buffett's lead and dipping one's toe in the water on the long side. One way to do this would be to sell a cash-covered put such as the August $160 put at just over $7, or more than 4% of the strike price. At worst, one ends up owning the stock at the strike price minus the premium collected, or approximately $153/share, which is slightly better than a 5% discount. The standstill rate of return works out to better than 30% annualized. In the event one is "put the stock," one could then sell upside calls to reduce one's cost basis and generate additional premium. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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