Constellation Brands (NYSE:$STZ), the world’s largest publically-trading winery, took an absolute beating yesterday when the U.S. Department of Justice torpedoed the Grupo Modelo (OTC:$GPMCF) – Anheuser-Busch InBev (NYSE:$BUD) merger on anti-competitive grounds.
Given the wide variety of alcoholic beverage choices, the government’s move seems a little absurd. Yes, roughly 80% of all beer drunk in the United States is sold by just four mega-brewers. But I hardly see this as being risky or detrimental to the wellbeing of American consumers. It reminds me of a (perhaps apocryphal) quote from the baseball player John Kruk. When told by his doctor that he needed to stop drinking so much beer, Kruk smiled and said he would switch to whiskey.
If beer became too expensive due to monopolistic pricing, U.S. consumers might do the same.
But whatever you think of the government’s decision, Constellation was the biggest loser here. Under the planned merger, Constellation would have had exclusive distribution and marketing rights for Corona and Modelo’s other beer brands in the United States (Anheuser-Busch InBev would have acted as the supplier).
Constellation needed this. As I wrote in July of last year when the deal was initially announced, Whiskey and Beer are Better Long-Term Bets than Wine.
While wine is more popular than ever among American drinkers, it’s not the best business to be in at the mass-market level. Think about it. Off the top of your head, how many beer brands can you name? A dozen or more without even having to strain?
Now…how many wine labels can you name?
Unless you are a true connoisseur, you would have a hard time naming more than one or two. Outside of the elite Château Lafite Rothschilds of the world, the vast majority of wines have very little in the way of name recognition.
As I wrote in July,“Outside of, say, Coca-Cola (NYSE: $KO), beer and spirits are probably the most recognizable and valuable brand names in existence. Not surprisingly, premium beer and spirits businesses tend to enjoy high margins and high returns on equity relative to their peers. [As a case in point, Diageo (NYSE:$DEO) enjoys a return on equity roughly double that of Constellation.]
“Wine is a different story. The attractiveness of a given vineyard varies from year to year, and few have national or international brand awareness. Wine connoisseurs know their favorite vintages, but there is little brand loyalty at the mass-market level. For a company of Constellation’s size, wine is a much harder business to operate.”
After yesterday’s 17% drubbing, Constellation trades for 15 times earnings and 2 times sales. This is not expensive by today’s market standards, but it’s far from cheap.
Before the Modelo-Bud merger was announced last summer, Constellation was a $20 stock. The merger announcement caused the stock to nearly double in the six months that followed. So without Modelo, is Constellation a $20 stock again?
Probably not. But without Modelo, it’s certainly not a $40 stock either.
I would recommend avoiding Constellation for now. In the world of booze stocks, there are better values out there. My favorite today? Dutch megabrewer Heineken (OTC:$HEINY).
At 20 times earnings, Heineken is far from cheap. But it’s one of the best options today for getting exposure to the rise of the emerging market consumer, and particularly the rise of the up-and-coming African middle class.
Disclosures: Sizemore Capital is long HEINY.
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