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Time to Buy The #1 Beer Stock in America? (Recent Berkshire Investment) $STZ
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This episode is presented by Interactive Brokers. Interactive Brokers is the best platform for global investors. From their one of a kind market coverage to their best in class pricing, IBKR truly has it all. If you're serious about investing, head on over to ibkr.com stay tuned for more Interactive Brokers later in this episode.
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Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
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A
Welcome into the Chit Chat Stocks Podcast, a podcast to help you find your next great investment. Today we have another research episode covering a company we've never discussed before, Constellation Brands, a leading beer producer. And it's going to be research. Well, it has been researched by Ryan. He's going to go through an overview, comprehensive overview of the business, its history, financials, its valuation and much more. And we're going to talk about during the episode whether Ryan is going to be adding it to his portfolio. It's going to be a fun look at this one. It's a company that I believe Berkshire Hathaway did recently purchase in 2024. 5 and it's down significantly since then. So maybe investors get a chance to buy after the old buff dog bought at a much higher price. We're going to get into all that, but first as a little housekeeping, we don't do this every episode, but I will say for anyone that enjoys these shows, if you're listening on Spotify or Apple Podcasts, if you're watching on Spotify please the easiest thing to do to support the free show and help us grow is give us a five star review on Spotify or Apple Podcasts. Subscribe on YouTube or as always join our email newsletter and the subscriber chat for that. We talk about all sorts of things in the subscriber chat, including things we're going to talk about for future Power Hour episodes, future stocks to talk about for these research episodes, other topics and many more investing focused discussions. But first I think that's it. Ryan, let's get into the episode Constellation Brands. Where do you want to start?
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C
I've got a quote that I found from an excellent write up on the company. It says once the expansion phase concludes after fiscal 2028, the strategic implication becomes clear. Growth capex should fall from the current 1 to 1.2 billion per year to approximately 256 million annually, representing only maintenance spending. That capex reduction will liberate substantial free cash flow, potentially an additional 750 to 950 million dollars per year above current levels, which management can deploy toward deleveraging dividend growth and share repurchases. I'll stop it there. This is a very durable business. I guess it is sort of consumer discretionary, but it's, it's doesn't have quite the ebbs and flows of a tech company. I'll talk about the portfolio of drinks and beer brands that they own, but before I do that, I should talk about the history. Constellation Brands is an 80 year old company, actually, but the Constellation brands that we know today was really formed more in 2013. So relic like it's old, but the modern business model is relatively new. I'll make the origins portion here a little brief because they don't matter too much to the business anymore. But there is maybe some competitive advantages in terms of distribution that they've built up over the last century, even though it's not exactly the same alcohol that they're selling.
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A
So.
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C
Constellation was established in 1945 by Marvin Sands east in the Finger Lakes region of New York. At the time, he incorporated the business as Canandaigua Industries. Apologies if I'm pronouncing that wrong to any of the founding family that still cares about the original name. But it was basically just a wine producer. So that was where they got their start. And over the next 50 years they expanded gradually with acquisition after acquisition of various wine brands. This was actually in, I think like 2005, I want to say it was the second biggest wine company in the United States. But going back real quick, they went public in 1973, and by 1980 they were the 8th largest wine producer in the US with 50 million in sales. And in the year 2000, they pivoted, I guess to Constellation Brands. It was still the same business, but they were renaming themselves so that they could reflect their efforts to expand outside of the wine category. At the time, they had just over a billion dollars in revenue. So this is 2000, but from 2000 to 2010 they kept buying sort of these random alcohol brands. You'd probably recognize a lot of them. I'm not saying you like you, Brett, but you might, my listeners might recognize some of these alcohol brands. There was a bunch of whiskey brands. There was some vodka, including Svetka, which is a popular vodka brand, I guess, which they acquired in 2007. They had some ciders and of course There was their massive wine portfolio. But in 2013, the business pivoted into what we now know. So here's how it happened. In June 2012, Anheuser Busch, which was the largest alcohol company in the world at the time, the parent company of Bud Light and Michelob Ultra and Budweiser, they announced a proposed $20 billion acquisition of Grupo Modelo. Grupo Modelo was the leading beer company in Mexico and there and it was through a bunch of partnerships also distributing their beers elsewhere. But it's home to brands like Corona Modelo, Pacifico, Corona Extra was the number one imported beer into the US at the time. And I just went visited Mexico. I gotta say these you basically, you go to a restaurant, you got essentially two choices, Pacifico or sorry, Modelo and Corona. And there is incredible brand affinity over there. But anyways, back to the story importantly and we'll get to this in a bit. Grupo Modelo was also vertically integrated. So they controlled nearly every step of production, owning their own barley malt plants, their own glass bottle factories, their own metal can facilities and even a shipping fleet, which is usually that, that's quite rare. Usually the beer brands will partner with distributors. But they also had, so they had a massive distribution network in Mexico which included. Actually this is funny because you just don't see this in the US The Modelo Rama convenience stores, they had a series of convenience stores based around the Modelo brand for distribution in the U.S. however, they had a joint venture partnership with Constellation Brands. This was prior to any deal between the two. This was called Crown Imports. I think it was a 5050 joint venture. And I'm assuming this is where Constellation Brands figured out. There's a ton of momentum for these Mexican beers in the United States. So back to the acquisition. In 2013, the Department of Justice filed an antitrust lawsuit to block Anheuser Busch from acquiring Grupo Modelo over concerns much market concentration. In June 2013, Anheuser Busch and the Department of Justice reached a settlement that Anheuser Busch would they could make the acquisition, but they would have to sell off Grupo Modelo's US business. That included the exclusive right to sell Grupo Modelo's brands in the US as well as their state of the art Piedras Negras Brewery, which was in Nava, Mexico. It's right on the border. The buyer was none other than Constellation Brands. So that's kind of a little bit of the history leading up till 2013 and then we can talk about this last decade and what's happened since. But Constellation Brands paid $1.85 billion to acquire the remaining 50% stake in Crown Imports, which was that joint venture that they had. So they bought out the Grupo Modelo
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A
portion,
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C
and then they had. They had to pay another $2.9 billion for the brewery, which is. I think people hear the term brewery, and they maybe think of like, the microbreweries that your friends are like, yo, you know, we should go to the brewery. This is different. This is a massive, massive, massive facility right on the border. That is a huge competitive advantage. I mean, they. It cost $2.9 billion in 2013 for Constellation to acquire this facility. So Constellation took on more than $3 billion in debt to make it happen. However, their leverage ratios quickly started to come down once they started collecting all the earnings from Grupo Modelo's brands. I'll leave it there. Any questions on the history?
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A
So let's just sum it up. AB and Bev wanted to acquire this company, but there was a lot of antitrust concerns. And then to assuage those concerns, they said, look, you can have access to these Mexican brands globally within the United States. There needs to be a separate owner. Constellation Brands stepped in. They already had a joint venture with the company, and they acquired both the rights to sell and the distribution with this brewery stuff that you were talking about for $4.75 billion. That bout sums up what they. What happened in the. In the quick history. And then the. The exact brands they own would be Corona, Modelo and Pacifico. Those are the big three. Maybe they have some others that are smaller, but those would be the meaningful ones. They don't have Dos Equis, but they have the vast majority of the. At least within the United States, probably Mexico as well. The largest kind of mainstream brands out there for. For the, for the Mexican style.
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Exactly. And. And they did, at the time of the acquisition, they did have other notable wine brands. I mean, they were one of the. They were still one of the largest alcohol companies in the US and they had built up that distribution muscle from both the partner, the joint venture with Grupo Modelo, but also just over a century of distributing wine. So at the time, it was. The beer portfolio became about 50% of the business, but there was still 50% that was wine and other spirits brands. So today, I'll talk about it in a bit.
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It's very different.
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It's predominantly beer. And for all intents and purposes, and I think it's purely the U.S. i would guess 90% plus of the revenue for Constellation Brands comes from the U.S. they don't even split it out. So they probably don't split it out for a reason. They've got the exclusive right to Modelo Corona Pacifico in the United States. And then I assume the wine is distributed primarily in the United States as well. But yeah, that's. This is a U. Mexican beer brands operating in the United States.
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Right there is that little quirk or let's go through the post acquisition decade. What happened here? You've labeled it a decade of expansion. I'll share a chart here. Take us through what happened after they acquired these companies or sorry, after they acquired the right to distribute these brands in the United States.
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Yeah, so if Brett can share this chart I put here warning, don't show, don't show this chart to someone who thinks alcohol is a dying industry.
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Well, the last, the last bar here, we may need to discuss and see what your thoughts are on that. But yes, I mean the shipments have grown, yeah, up.
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And from 2013 to 2025, basically beer volume for Constellation brands were growing at around 8% a year. Today it's dropped a little bit, but still 7% a year volume growth over the last basically decade. So what exactly has happened? Some of it is sort of luck, honestly for Constellation Brands, but they've also built this sort of blueprint for growth. And I think there's pretty much three pillars to that blueprint. So the first one is production and distribution expansion. So at the core of all of it is expanding their production and then entering more doors, whether it's grocery stores, convenience stores, bars, trying to think of other locations, but you know, the distribution side. So to meet demand, Constellation has poured billions of dollars and is continuing to pour billions of dollars into expanding its Mexican brewing capacity over the last decade. We're going to talk about the consumption habits here in a second, which I think is sort of more of an exciting discussion. But I want to underscore how important these breweries really are. Like I said, these are not your microbreweries. This is not, hey, do you want to go to the brewery with your friend? These are massive, massive plants. The novel location, for example, is twice the size of Tesla's Fremont factory. So this is. And if you're not sure, can't visualize this, I actually recommend looking up picture of the Nava brewery for Constellation brands. Anyway, it's huge production advantage relative to smaller beer companies. So they've got three main breweries, two are currently operational and then one is planned. So the first one is that Nava location mentioned earlier. This is 885 acres, twice the size, I believe of Tesla's Fremont factory. And it accounts for about 70% of their production. And they've been gradually spending Capex to both expand and optimize that facility. Then the second facility is in Sonora. They acquired this from grupo Modelo in 2016. So following the acquisition for about $600 million. It's about one third the size of their Nava brewery. So not, not quite as big, but they needed extra production capacity and they got it from Grupo Modelo. And then the last brewery is in Veracruz. So this is still currently under construction, but production is expected to start in late 2026. This should rival Nava in terms of production capacity. It's supposed to be another massive facility for them. So between these three facilities, and they actually had one abandoned one due to some, I think, environmental concerns from a regulator, they have been in a constant state of expansion over the last decade, which has led to Capex being significantly higher than it would be on a recurring basis if they were just maintaining their existing facilities. And you can see it when you compare it to like Anheuser Busch or Carlsberg or Molson Coors, they're spending a lot more on Capex as a percentage of revenue than those other companies. Then on the distribution side, this is always going to be a perpetual focus for any beer company but Constellation, Constellation works with regional wholesale distributors to expand their brands into more bars, restaurants, grocery stores, convenience stores. And there this is also an advantage for them. So sales reps from wholesale distributors, they get paid through commission on a per case or per keg sold basis. So they have incentive to push the products that are most likely to sell, which is much greater for Constellation brands because they have some of the best selling beers, they have the beers that are the most well known. So from that sales reps perspective, they're more inclined to go out and push Constellations brands, Modelo, Pacifico, Corona to new doors so that they can get a higher commission. And then I also want to underscore how big of an sort of embedded advantage this is in the beer business. Wholesalers, like I said, focus on the brands that sell well, which tends to be giant national brands because well, that's the brands people know. But it also insulates the incumbents a bit because it makes it easier for Constellation or any of the big beer producers to place new brands like Corona Cero for example, that their non alcoholic beer that that's been pretty successful into existing distribution channels as opposed to having to win over an entirely new channel does that all kind of make sense.
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A
I think it does. And I appreciate the proper pronunciation of Sarah there. You know, for, for any of the listeners south of the border. For us, it's interesting that within the beer space, the moat is almost, oh, I'm at this new restaurant, or I'm at this restaurant I always go to, or I'm at this bar I always go to, or I'm at the grocery store, convenience store and I'm picking up beer either for myself or friends, buying a round of drinks for the group, something like that. And the mode is almost, well, what do you recognize on the menu? And for the big players, Anheuser Busch, Constellation Brands, Molson Coors, you go, well, hey, yeah, I like Corona, I like Pacifico, I like Mandela. Let's just get some Modelos. Yeah, people will like that. You know, no one's gonna be afraid of trying this new microbrewery from around town. And I think that's really where the market share stays stable. But as you're going to get into. And maybe it's next, actually. Well, we're going to get into the. What are the asset sales for the wine business next? But there is market share gain for the Mexican beer brands within the United States. We're going to talk about that and how that's happening, why you think that's happening, why that may continue. But first, I guess selling the wine business or the wine businesses and maybe, you know, getting rid of some bad assets. Because in my humble opinion, as someone that's not an expert on the wine business, I feel like there's zero net value creation of the last thousand years. It's almost a. It's a hobby industry. It's kind of like airlines. But take us through it. And what are your thoughts on. On the consolidation of the business?
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If you're a regular listener to chitchat stocks, then you've probably heard us talk about Interactive Brokers. Here are three reasons why we think Interactive Brokers is better than any other brokerage platform. Number one, they've got it all. Stocks, bonds, ETFs, options, crypto, you name it. 170 markets, 36 countries, 28 currencies. Number two, they've got best in Class pricing. They have zero commissions on US listed stocks and ETFs and offer margin rates up to 54% lower than the industry. Number three, you can ditch the separate High Yield Cash account. Interactive Brokers offers up to 3.14% interest on instantly available cash held in your investment account. Head on over to ibkr.com Rate subject to change Margin involves risk restrictions apply Interactive Brokers is a member of sipc. Yeah, and it's kind of funny how the wine business, the wine industry has ended up so different than the beer industry in terms of consumer habits where consumers are more willing to like expand into a wine they don't know. As opposed to beer consumers, you're going to go with what you know at a restaurant. Whereas wine, it's kind of like, you know, whatever you think is best.
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Yeah, I think it's specific because wine is like the type, you know, red or white and then the specifics within that and then the region they have specific taste profiles where with beer it's almost like cigarettes where you have the taste of that specific brand and maybe that's where you have the advantage for the brands as opposed to wine. There's not really a brand you go at least for the everyday consumer. Oh, that's great. Yeah, yeah, everyone will love that. We'll get that kind of go. Oh, pick one, take it, take it. Sure. But sorry, I'm distracting you. Go through the actual financials and what happened here.
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Yeah, so this is kind of the second pillar that I called it and that's consolidating focus. So basically over the last decade since they made the big beer acquisition, they have been divesting a bunch of non core assets. So I'll go through, I'll just list off a bunch of these. In 2016, they sold their entire Canadian wine division for $784 million. 2021, they sold the Masson brandy business for 255 million. 2021 they also sold their New Zealand based Nobilo wine for 130 million. They sold 30 low cost wine brands that they owned in a big portfolio sale for 810 million. A bunch of other wine portfolio sales, 2025 actually had a big one. They sold another chunk of brands, including Robert Mondavi, which is apparently popular. Honestly, I don't know what it is. I'm not a big wine connoisseur, but that portfolio of brands sold for 900 million. In total they've sold I believe around 2.9 to $3 billion worth of various alcohol assets over the last decade.
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And for reference for the listeners, current market cap is $26 billion. So maybe 10% of the current market cap.
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Yeah, and it was a good chunk of revenue. So in 2015, 53% of revenue came from beer, 47% came from wine and spirits. Today, 88% comes from beer and 12% comes from wine and spirits. So part of that is the volume increases in beer relative to wine and spirits. But a lot of it has also been the asset sales. And if you look at revenue growth, it hasn't been as strong as beer volume growth or beer revenue growth, I should say, because they've had those asset divestitures. So like over the last year they sold off that big wine portfolio and they had a beer volume decline. I'll talk about that in a sec. It makes revenue growth look way worse. But there's a lot of inorganic decline there because of the asset sales. Anyways, the reason I mentioned this as sort of the growth pillar in the growth blueprint is because the divesting of these lower margin assets has allowed the company to a reduce its operational footprint. So they got rid of some lower margin vineyards and production facilities. But it also has freed up capital for management to then redeploy back into their beer business, both in terms of expanding production and marketing their beer brands, which are already have seen so much success. The third pillar here, and it's really hard to call this like this is more of a result than an input, but I think it's maybe the most important thing that we're going to talk about today. This is the market share gains. So there have been a couple of drivers here, a few drivers I should say, propelling these market share gains. The first one, and this is the most obvious, most tangible, something easy to point to, and you could say this has been a massive tailwind for them, is the demographic tailwind. The U.S. hispanic or Latino population has grown rapidly over the last decade. In 2010, there were an estimated 50 million documented, documented Hispanics or Latinos in the United states. As of 2024, there were 68 million. So there's been 18 million new Latino individuals that have come to the United States, likely bringing over an affinity for constellations brands already Modelo and Corona were popular there. They come into the U.S. they're going to continue to consume those brands. That population growth has completely outpaced the US broadly. So Latino as a percentage of the US population has risen. Additionally, Latino households are making more money. So the estimated real wage growth for Latino households has increased 61% since 2010. So the real wages, I should say, not the real wage growth. So they're earning a lot more and they're earning. The real wage growth has been about three times faster than non Latino households. There are a bunch of reasons for why this was happening. I wasn't totally sure exactly why it was happening, but if you look it up, if you ask Gemini or whatever, you know, why has real wage growth been so strong for Latinos in the United States? They give a plethora of reasons. It's not just any one reason in particular, but ultimately it means more Latino families and households are joining the middle class, which means there's more room for discretionary spending on things like beer. So massive demographic tailwind. The second one has been aggressive marketing. Modelo Especial spent more money on TV ads than any other beer brand in 2020, 24, spending an estimated $65 million on TV ads. It's always a bit tough.
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I was gonna say they're keeping the NFL in business. I understand their ads. They, they get tiresome after a while, but they're. They're pretty good. Maybe not as good as progressive, but they're good.
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Yeah, it's. It's kind of hard to pin down, like, why marketing for a specific consumer brand works, like, what makes it special. And it feels like in this case, they kind of do a good job. Constellation does a good job of capturing two different types of consumers. They've got Corona, which targets like the beach going party type. And then they've got Modelo, which focuses more on character traits of like, perseverance and grit. And maybe as you're listening to this, you might remember some of their commercials of the like, mark of a fighter mantra.
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Yes. Yeah. All over. Yeah. Every sports game they have these. Yeah, it's more for, oh, the working class sports fan. Something like that.
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Exactly. And that's. It resonates with Latinos in the United States because they generally skew more towards working class as opposed to maybe other demographics.
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And the commercials are filled with famous Mexican Americans, or maybe not just Mexican Americans, but famous people that they can relate to drinking Modelo. That's simple as the Coca Cola formula, the Marlboro formula, the candy formula. Just show the people drinking it and hey, look, people will recognize your brand.
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Yeah, that's exactly what they've done. And it's not only resonated with Latinos, but other demographics that kind of, whether it's aspirational or they are working class or they want to be, feel like working class, they've adopted the Modelo brand. So that marketing has worked. And it has actually worked especially well considering that there were some competitor slip ups recently. So this is, it's not really. I can't call this a part of their growth blueprint, but it sure has helped Constellation. It's no secret that Bud Light lost some market Share over the last several years due to some controversial commercial marketing. And this honestly did surprise me. I remember talking to you about this. Brett's sharing a chart here on the beer volumes of Anheuser Busch versus Constellation Brands. So I'll talk about that in a second. But I would have thought customers would just get over the the marketing controversy and go back to their consumer habits. But it did put a real dent in volume. Many Bud Light drinkers did not want to associate with the brand anymore which led to a 13% volume decline in North America in 2023. For Anheuser Busch that was their largest drop I think ever year over year. Meanwhile, Constellation brand stuck to the same consistent mark of a fighter messaging. Corona had sort of different messaging. But for Modelo specifically that that ended up being sort of really, I guess lucky counter positioning relative to Bud Light because they were losing, while Bud Light was losing some of those more working class type customers. Constellation Brands and Modelo was right there to sort of capture them with that working class type marketing. Would you agree with that? Have you witnessed that at all?
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I don't know if I anecdotes matter too much here but I think yes, Modelo and Bud Light are targeting similar demographics in the United States. Working class maybe is what they kind of go after in their marketing. Working class plus sports. Medela knows this, but I think the dirty little secret and the one that you could see from your chart here is that the 2023 or what 2022 or 2023 mishap for, for Bud Light it was not some one off thing. Modelo, the Mexican beer brands, whatever Constellation brands owns, have been taking steady share from Anheuser Busch for a full decade now. And it's showing no signs of slowing down. So that's kind of the huge or not huge, but it's the market share gains over a decade and kind of that Peter lynch style that we like of all right, the company has shown, you know, Mandela might have what, 6% market share in the United States. It's a pretty bifurcated industry. But can they keep steadily taking share? Maybe 10 basis points, 20 basis points each year. That's a huge opportunity for them. They've shown they'd be able to do that over the last decade. They have the same formula. Maybe they can do that over the next decade as well. It wasn't just about the Bud Light marketing mishap, although that did help them give a nice little boost for a year there.
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C
Yeah. And just to put some numbers on it, since 2014, Anheuser Busch's North American beer volumes have declined by 32% over that same time period. Constellation Brands beer shipments has increased by 137%. So yes, there was sort of that one time slip up from competitors that maybe accelerated an overall trend. But like you said, it's been a gradual taking of market share. Before we move on and talk about whether or not some of this growth can continue, I do want to mention Portcito. Portcido is currently my favorite portfolio tracking tool and this morning I had to eat a slice of humble pie because I wanted to know what my returns have been against the S&P 500 over the last year. And well, with the software sell off they haven't been that great. Which is sort of what inspired me to look into Constellation Brands to begin with because Portcito's got this analytics feature and they've got a great pie chart of your industry breakdown on what companies you own. And more than half of my portfolio is in technology or tech adjacent sectors. So I want to try to look into stuff that's not adjacent to technology. Not necessarily because I think there's better opportunity there, but because it's not great when all the companies in your portfolio go down at the same time. So anyways, Portcido's got got that great feature. They are really the complete portfolio performance tracker. It you can easily aggregate various brokerage accounts and see your total investment returns versus the indices that includes all your investments. So stocks, ETFs, crypto, they even have a dividends tracking dashboard. And I've been looking for a tool like this for a long time because if you've ever tried tracking your own returns, it's a nightmare. So Portcyto has finally built it. If you're interested in checking out your own returns, head on over to portcyto.com the link will be in our show notes. Let's talk the next decade because we're at sort of an interesting point in time. After a decade of consistent volume growth, we have now seen, I think for the first time ever, or at least since 2013 since this happened, year over year volume declines across both Modelo and Corona brands. And actually Pacifico has been immune for some reason. Pacifico has done really well. I'm not sure why it's like in its own world, but who knows?
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I, I like that. I like the taste of that better if I'm being honest. And you want to know a fun fact, Ryan? The logo on Pacifico. I've hiked to the top of the mountain on there, it's in, it's in a city in Mexico. It's a, it's a thing you can do for the, the home city of the brand. But it's significant from an investor perspective. It's significantly smaller volume wise. Correct. Than Modelo or Corona?
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C
Yes, correct. Modelo and Corona are both larger and Corona's decline has actually been more pronounced than Modelo's, but both have seen declines. So I guess the question is what's causing it? And this is the single biggest debate around the stock right now. And it's why it looks cheap in my opinion. So the concern from bears or skeptics, I should say, is that the decline is linked to the growth of GLP1s, weight loss, drugs and people consuming less beer. And if that's the case, basically people are worried that that's going to be a structural headwind to this business. Constellations management team, on the other hand, believes it has more to do with the macro environment, particularly for the Hispanic population. So here's a quote from the latest conference call. Relative to the beer category overall, it still remains challenged and it's largely around the Hispanic consumer. 75% of the Hispanic consumers are very concerned about the sociology economic environment. And they're being much more careful about their spending patterns, spending much more on what you would call consumer essentials versus other categories. So I think that's going to continue to be volatile going forward. But this is where our focus remains on controlling the controllables and that is distribution. That's price pack architecture. That's doing the right things to set ourselves up for a successful future.
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A
Have they said anything about the immigration crackdown? Because we've seen a huge reversal of people coming into the United States from Latin American countries versus now there's net outflows.
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C
All right folks, before we move on, let's talk about our home for investment research, Fiscal AI. Fiscal AI is the complete stock research platform for fundamental investors. We use it every single day here at Chitchat Stocks. It has everything you need to research individual companies from 20 years of financial data to company specific segments and KPIs, earnings call transcripts, Morningstar reports and insider ownership data and much, much more. And they just lowered the price of their Highest tier by 60%. If you want a complete enterprise grade financial data terminal, check out Fiscal AI. If you use our link Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. And if you want to upgrade, our link will get you 15% off any paid plan. Again, that's fiscal AI chitchat. The link will be in the show notes. I think they were beating around the bush with it with the basically survey stats of Hispanic consumers being concerned, which
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A
I feel like that's part of the reason why they're concerned, I would say. Yeah, okay.
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C
Yeah, I mean, I assume so too. I honestly, I do not know where I stand on this debate. So which is this is not the immigration debate. The beer, is it GLP1s or is it macro concerns at that debate? The rise of GLP1s certainly does not benefit alcohol consumption. But I also do believe there is some genuine wallet pressure on Latino consumers or Hispanic consumers right now. And it would make sense that there's some cautiousness from them about going out and spending a bunch of money at bars. And keep in mind, bars are higher ticket sales. So it's more helpful on a revenue basis for Constellation Brands. Whereas if you see, like if they're buying at grocery stores instead of bars, that's going to be a revenue headwind for Constellation. So I can see that being a concern during the Trump era, but I, I don't know. I honestly, I don't know. So I guess this is like the big discussion question. I want to pose this to you. Do you think Constellation Brands will be selling more beer in five years?
- [37:49]
A
All right, so we're just looking at you. It's essentially a bet on will in the United States. Will Mexican beer volumes be higher in five years, give or take that, right? Yes, it's kind of the same question. I lean towards higher, especially with this all. We already had a down year this year because when you look at GLP1s, it seems like for one, it's mainly focused on food, but it seems to help a lot of people with binge drinking, alcoholism, you know, kind of terrible diseases that people have and to help them fix that. I don't know if necessarily that feels more like people buying a cheap bottle of vodka and drinking the whole thing on their couch type problem as opposed to, I'm going to have some modelos at the bar. Now, it's very hard to say because you don't know exactly what's causing this and that's what's getting people nervous. But I would lean towards people are still going to be drinking these classic beers. And like the last 10 years, even if there's a short term headwind due to some immigration stuff maybe, or as they talked about in the conference call, distinct headwinds for Latinos economically in the United States, I feel like Mexican beers overall will continue to take market share. I don't see any reason why the last decade can't continue, especially because they're all. They're still not. I mean, Modelo is number one now, but they're still. They're not like, oh, this is a 60% share now. There's not really much room to grow. They're like 5%, I think. And overall maybe Constellation Brands that 10%, something like that.
- [39:34]
C
Yeah, it's. I just like shrug my shoulders because obviously GLP1's all else equal, not a benefit to Constellation. It's going to be some level of a headwind, but I think the tailwinds that we've seen over the last 10 years should still persist over the next five. So I'll talk through some of my estimates here in like 10 minutes, but I think there will be volume growth, but I pegged it at a slightly lower rate than they've had over the last decade. Let's talk the catalyst. Not. I'm not a big catalyst guy usually. I usually don't care.
- [40:16]
A
But this is liberating the cash flow. I think that was a very. I'm going to steal that term. Activists need to start stealing that term. We're going to liberate the cash from your balance sheet. This is the CapEx cycle, correct?
- [40:28]
C
Yes, it is a funny term. It makes it feel like it's. The cash is being held hostage by the management team.
- [40:35]
A
It is. I mean, talk to a Japanese team, Japanese executive, tape doctor, Nintendo shareholder. It pretty much is, yeah.
- [40:44]
C
So this is one of the things that actually drew me to Constellation Brands and it was the catalyst that I alluded to earlier in the episode. So Constellation has been in a steady state of brewery expansion for almost a decade at this point, following the build out of their new Vera Cruz plant, the expansions at Nava and the expansions at Nava, this capex should drop significantly in 2028 and beyond. So over the last five years they've averaged just over $1 billion in annual capex. I'll get to my estimates here in a second, but I believe around 70 to 80% of that is growth CapEx, meaning that maintenance CapEx and therefore what we should see in 2028 and beyond will likely be way, way lower. So here's. Let me Talk through the CapEx Compared to peers, Constellation Brands CapEx as a percentage of sales has been about 11 or 12% over the last four years. Anheuser Busch is at 6%. Carlsberg and Molson Coors are also around 5 to 6%. So and they're both. Those brands are actually still in the process of various growth and modernization projects. So maintenance capex should even be lower than those companies are reporting in 2019. Constellations management team actually gave us some visibility into the growth versus maintenance debate. So in their planning for that capex cycle they guided for 1.15 to 1.25 in total capex and specifically they earmarked 900 million of that for Mexico beer expansion activities. That means about 250 to 350 million was left as maintenance expense. So or maintenance capex that means capital expenditures excluding any growth investments would have been 75% lower than the total figure. So about 3 to 4% of revenue. That is my sort of estimate on Capex as a percentage of sales for 2028 and beyond. I basically leave it at 3 and a half percent until they decide they're going to launch some new production.
- [43:05]
A
Okay, we're going to get to the valuation now. Go through your estimates for the business. Talk about capital returns, earnings ratios, free cash flow, growth, all that good stuff. And I think maybe a lead off with this question. I look at the total return chart here. Last 10 years and again this is including dividends, total return is 30% cumulative is maybe to kick things off. When you ran through kind of your numbers, did you find any convincing reason why this could change and it could be over the next five years 100% return or something where there actually is. Because if you were an investor and you look at this and you go ah, if this happens again over the next 10 years like we're just going to be treading water and there's just no room for growth? Like why do you, why did that happen and why do you think it could be. Is there any reason it could be different over the next five?
- [44:01]
C
The capex buildout is really a huge deal for this business. So there is, there's going to. Assuming they finish the Veracruz plant and they don't do any massive add ons to the Nava plant, you should see a huge jump in free cash flow. That would be sort of an unlock I imagine. And what people are looking for, the other part here is the total return looked a lot better prior to the volume declines at Modelo and Corona. So I think what's happening at the moment is people are extrapolating out beer volumes going nowhere or even going negative on top of massive production expansion because if they're expanding capacity and they're seeing less volumes then they're generating even worse returns on those facilities.
- [44:52]
A
Right. More invested asset. Yep.
- [44:55]
C
So I would say if you're a believer that volumes are going to grow, then we're in the same camp and I'll talk through some of the numbers. The formula for growth for this business is really pretty straightforward. It's volumes plus price gets you your revenue, specifically beer revenue or beer volumes plus beer prices gets you your revenue. Because wine at this point is going to be small and probably stay small, operating cash flow margins should stay relatively steady. I marked in some gradual expansion as you get more efficiencies out of the new production facilities. But again, depending on utilization at those facilities, margins can, can vary. But I basically just assumed a little bit of margin expansion and then you deduct your capital expenditures and that gives the cash that management can distribute to shareholders or, or to pay down debt. So they might also get some cash from any divestitures they do. But by and large, their free cash flow is what's going to create their distributable cash. And they do tend to distribute all of it. So over the last two years, they've spent almost exactly 100% of their free cash flow on capital returns to shareholders. That split has been about 70% buybacks, 30% dividends, and actually the combination right now of dividend yield plus your buyback yield is returning about 7.5% of the market cap in cash to shareholders shareholders each year. But let me walk through some of my projections. I think they will have some volume growth. The tailwinds that have persisted for the last decade I think will continue. So I'm pegging it at 3% volume growth annually. Prices over the last several years have grown at about 2% a year. I think that will continue. I don't see anything that's going to harm that Wine revenues. I expect to be flat. Who knows, maybe they'll divest more, maybe they won't. Shouldn't really matter to the thesis. And then operating cash flow margins expand from 30% roughly to 32% over the next five years. Two more. I know I'm going through a lot of numbers here. I don't want to bore people, but this is the big one. I think Capex as a percentage of sales is going to drop from basically 12%, 11%, 12% to 3.5%. This would give them three and a half billion dollars in free cash flow. That's basically twice what they're generating currently in 2030. They tend to keep their net debt to EBITDA consistent around three to four times. And Most of their senior notes are due after 2030 and the interest rate's pretty low. So I assume they're going to likely roll that debt and just continue to allocate the distributable cash to buybacks and dividends because they can get a better return on it at the current stock price. So I know that's a lot. Just to rehash those numbers, I think they can generate three and a half billion in free cash flow by 2030. They have a 26.5 billion dollar market cap today. That means I believe they would be generating 13% of their market cap in cash in five years. Plus the market cap should come down. If the stock price doesn't change, market cap will come down as they reduce share count. So the one lingering question I have is what happens to volumes for the next five years? Because it feels like that kind of makes or breaks the thesis.
- [48:34]
A
Well, I would agree, I think, yeah, that is the big question. That is why the stock is down. I don't know. What is it in a 50% drawdown and significantly lower than when Berkshire first bought. If the volume declines, say, continue at 2 to 3% a year and price increases are what, 2%, 3%, like you were saying, you probably get an okay outcome. You maybe get a total return of 20, maybe 30, 40%, something like that. I could see that over the, the next couple of next five years, which isn't nothing to scoff at. Maybe a little lower, maybe 20 to 30%, maybe not 40%, but that's not an exciting proposition. My question for you, because I know the volume is an uncertainty. We just, that's kind of something you're just going into. All right, it may or may not happen. We're going to see what happens. The price is pretty cheap today to make up for that. But I think the key question is, and maybe a lot of listeners are thinking about this, do they have sustainable and durable pricing power? What are your thoughts?
- [49:40]
C
They've shown that they do over the last decade. So I can actually pull this up real quick. Revenue per beer shipment has grown at, grown from basically 15, $16 ten years ago to just over $20 today. It's not a huge jump, but that's a 30% increase over a decade. Obviously they're not going to double the price of modelo overnight, but 2% annual price increases, that to me is like they've shown some level of pricing power, especially given that they've doubled their volumes over that time as well. So my answer would be yes, like it's not significant. It's not going to be Marlboro levels of price increases. But people like specific brands and I don't think they're going to turn away because the price jumps 2% a year.
- [50:43]
A
Yeah, I feel like they can definitely keep up with inflation. I think that's, I would have high conviction in saying that. I could say they probably can go a little higher than inflation. But yeah, it's not going to be like tobacco where they can go, oh, whatever inflation is, we're going to go two and a half times that and no one's going to care because eventually if you're at the bar, the grocery store, let's say at the bar today at Modelo, depending on where you are in the United States is five bucks, you know, lower some places, higher other places. If you fast forward 10 years and it's $10 while a Coors Light 6. Yeah, you're not going to be able to get away with that. But it feels like generally the industry is somewhat rational across the big players. Anheuser Busch, Molson, Coors, you know, they might all have their own mistakes that they made. Constellation Brands has clearly outperformed them volume wise over the last decade, but it feels fairly rational. Similar to the cereal aisle, candy cpg. There's not some cutthroat competition where someone goes, hey, we're going to take the cost of Coors Light and we're going to put it to Z. Like we're going to have no margin on this. We're going to tell every bar, sell it for three bucks, sell it for 50% discount and just try to flood the market with that. That's not generally how, how it works. And you can see that in your day to day life.
- [52:01]
C
Yeah, I mean in the beer industry you don't see a company's competitive advantage in the price of their beer, it's in the production efficiency. So sure, if, if they've got the biggest facilities with I think the most you're really actually able to have is like 70 to 80% utilization at 1 of those big breweries, at least sustainably apparently. I read some stuff part of the
- [52:27]
A
process, part of the beer making process,
- [52:29]
C
how it like destroys the a lot of the equipment. But if you're able to operate at that consistently on a massive scale, that's going to be a lot better than the upstart local person who's having to pay twice as much on a per hectoliter basis to and then has to compete on price. Which is why you see significantly Higher margins, I imagine for the Constellation Brands companies versus the microorganism of the world.
- [52:59]
A
Yeah, we don't have their audited financial statements, but I think there's a reason why the, the Medelo can price at five bucks where your niche brand is at eight and then probably not making the same margin. There is, you know, reason for scale and negotiating leverage with grocery stores, bars and what have you go, hey, do you want all, do you want any Mexican brands in your bar? Maybe you can get to, I don't know who owns Dose Equis. You get someone else. Ducati. Don't forget Ducati Light. But if you want the big three that Constellation Brands has, you're going to need to go with our price. And they're going to have a bit more leverage in that negotiation as well. I think, Ryan, maybe if you have anything else on the business, the final question is what's your investment decision? Buy, sell or hold.
- [53:48]
C
So for a no growth or a low growth company, which I don't typically buy in general, I usually want it at a 7% true owner's earnings, whatever you want to call it. In this case, I think free cash flow is pretty equivalent to owner's earnings. I want it at a 10% free cash flow yield. At least right now we're a little under that. So I certainly wouldn't make it a big position. But I'm getting frustrated with a lot of my holdings going down at the same time or having too much like industry correlation. And I would rather have something that's got a 7%, 8% shareholder yield and is going to be a little more stable so that in the event people are still drinking and a bunch of my other companies go down, I can redistribute some.
- [54:44]
A
But let me, let me, let's put some numbers for the share for the listeners. Sorry, I keep thinking they're the shareholders, the listeners. The price today is 155, give or take as of this recording. The low was about 120, let's say seven, back around Halloween, 2025. So a few months ago, would that be around the price that you would consider if it got back there? Would you go, man, this is fairly attractive. I feel like we can get good upside, good margin of safety at those levels.
- [55:19]
C
Yeah, I think a 20% drawdown from here gets me to a 10% free cash flow yield. I'd feel comfortable with that. So I think when I think the numbers you just laid out there is about a 20% drawdown from the current prices.
- [55:35]
A
Yeah, give or Take. Sure, sure.
- [55:37]
C
So, yeah, I'd say once this gets above a 10% free cash flow yield, I feel comfortable making this like a core holding.
- [55:45]
A
It is just tough in general if something is not trading at say a 10 times p or something like that. And they do have the capital returns, which would be nice for that. But if you're just, you don't have the confidence in the durable growth, whether it's 7% revenue growth or 20% revenue growth, it's hard to buy something and go, ah, this is just such a great opportunity. If it's trading at 15 times earnings, it's just, it's tough. It's tough. And I feel like a lot of people make that mistake of going, oh, was that 25 times earnings? It's now at 15, but not growing. That, that, that doesn't really the, the circle. I'm trying to make the analogy of square squaring the circle there, but I think listeners understand you need a much cheaper price for, for a no growth business, which Constellation Brands is at risk of potentially happening, as we discussed during this episode.
- [56:37]
C
Yeah, I also, I think a lot of people underestimate how beneficial it is. Even if you have a company that only grows, say the top line at 3% or whatever, if they are trading above a 10% free cash flow yield, they have a lot of ways to generate good returns for you as an investor. Like I think that the first one is they can amplify the buyback. They can really start to cut down the share count, they can increase the dividend and then on top of it, in this case, you're getting a huge. As soon as they finish the expansion, you're getting a big free cash flow inflection. Which is going to mean probably some multiple RE rating would be my guess because there's a chance that without the stock price dropping at all, they're above a 10% free cash flow yield in two years just from the liberation of that free cash flow. So even though it might not be the sexiest business of all time, you can still generate pretty stable good returns.
- [57:47]
A
Yeah, to sum it up, you're not buying today. You were getting a little more greedy on what your entry point would be. But. But feels like you can get some acceptable returns going forward. And hey, it was good enough for Berkshire Hathaway. So we'll see. That's not a bad for a consumer type business. It's not bad to have them investing, whether it's insurance or consumer brands. Usually it's. It's a good sign if Berkshire is on your back now. Technology. That's, that's a, that's a mixed track record. Yeah.
- [58:18]
C
Berkshire does own, I want to say, 7% of the company. Yeah. Checking fiscal rule here, about 8% of the company. Besides Vanguard, they are the, the largest shareholder and no insider comes close to touching their ownership. So there is some say there, I imagine, in terms, whether they explicitly talk to management or not. I think they might have some opinions on where that cash flow goes.
- [58:47]
A
All right, Ryan, I want to go down to the convenience store and get myself a Modelo or Corona, but I think that's going to do it for us on this episode. As a disclosure, we're not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past. I may buy, sell, or hold them in the future. Thank you to our special sponsor on this episode, Port Sideo. Go check them out. I'll have a link in the show notes there. Both Ryan and I use them. It's a fantastic tool to track our returns. Thanks to, excuse me, our other sponsors as well. And we'll see everyone next time.