The at-home consumption of alcohol has surged since the COVID-19 pandemic. However, even after the easing of lockdown restrictions, on-premise alcohol consumption at bars and restaurants remains weak.
The US beer industry alone is expected to lose 651,000 jobs by the end of 2020 according to a report by the Beer Institute, Brewers Association, the National Beer Wholesalers Association, and the American Beverage Licensees. The report also states that the COVID-19 pandemic will result in a decline of over $22 billion in beer sales this year.
In these challenging times, we will analyze the performance of two of the leading players in the US alcoholic beverage industry—Constellation Brands and Molson Coors and use the TipRanks Stock Comparison tool to see which stock offers a better investment opportunity.
Constellation Brands (STZ)
Constellation Brands is a beer, wine and spirits producer and sells popular imported beer brands Corona and Modelo in the US market. In recent times, the company’s strong beer portfolio has helped it offset the weakness in its wine and spirits businesses. As part of its premium strategy, the company has been divesting its lower-margin wine and spirits brands to focus on premium lines.
The pandemic-led closure of on-premise channels like bars and restaurants had a significant impact on the company’s fiscal 1Q performance and led to a 6.4% sales decline even as off-premise consumption increased due to stay-at-home orders. COVID also slowed down the company’s beer production in Mexico and impacted the business in the first half of fiscal 2021. Constellation Brands expects its product inventories to return to more normal levels by the end of fiscal 3Q.
The company’s fiscal 2Q (ended Aug. 31) net sales declined 3.6% Y/Y to $2.26 billion with Beer segment sales down 0.3% to $1.64 billion and Wine and Spirits segment sales falling 11.2% to $624.5 million. Aside from the weakness in on-premise sales due to COVID, the company’s lower 2Q sales also reflected the impact of divestitures of certain brands in the Wine and Spirits segment and the Ballast Point divestiture in the Beer segment. Adjusted EPS, excluding Canopy Growth equity losses, came in at $2.91.
The company’s imported beer portfolio continued to see strong demand in 2Q with the Corona brand family growing double-digits in channels tracked by IRI (Information Resources, Inc.) driven by the successful launch of Corona Hard Seltzer and continued robust growth of Corona Premier and Corona Extra. Hard seltzer is a rapidly growing market and Constellation Brands aims to feature among the top three players in this space.
Meanwhile, the company acquired Empathy Wines, a digitally-native wine brand, in fiscal Q1 to strengthen its presence in the direct-to-consumer and e-commerce markets within the wine and spirits category. To further capture the surge in online sales of alcohol beverages, the company recently announced a minority stake in Booker Vineyard’s super-luxury, direct-to-consumer focused wine business.
Despite the year-to-date losses, Constellation Brands is still optimistic about its investment in cannabis company Canopy Growth and sees strong growth prospects in the recreational cannabis space.
On Oct. 2, RBC Capital analyst Nik Modi increased Constellation Brands’ price target to $243 from $216 and maintained a Buy rating. According to the analyst, the company’s September depletions were in the mid-teens as the company refilled its inventory, adding that he sees its on-premise declines as “moderate”.
Modi further commented that beer “consumption levels will remain elevated” as the impact from COVID is unlikely to dissipate for the next few quarters. (See STZ stock analysis on TipRanks)
The Street has a cautiously optimistic Moderate Buy consensus for Constellation Brands, which breaks down into 3 Buys, 2 Holds, and 1 Sell. The stock is down 2.2% year-to-date but could rise 13.9% in the months ahead as indicated by the average analyst price target of $211.33.
Molson Coors Beverage Company (TAP)
Molson Coors was struggling even before the pandemic as competition from hard seltzers and other categories have been dragging its beer volumes. The pandemic has added to the company’s woes by impacting the on-premise business.
Molson Coors’ 2Q sales fell 15.1% Y/Y to $2.5 billion with almost all the sales being generated by off-premise channels. However, adjusted EPS increased 2% to $1.55 as the company cut down its costs drastically and shifted marketing spending to the second half the year.
On a positive note, the company highlighted that it’s Blue Moon LightSky, a light citrus wheat beer launched in February, became the top-selling beer of 2020 as per Nielsen.
Meanwhile, the company is trying to capture growth in the hard seltzer market. It has launched two brands Vizzy and Coors Seltzer in this space. Molson Coors has also partnered with soda giant Coca-Cola to sell Topo Chico Hard Seltzer in the US in 2021.
At the same time, Molson Coors recently announced a new range of nonalcoholic products in partnership With L.A. Libations. The first product launched under this partnership was Huzzah, a full-flavored probiotic Seltzer. Other products in the pipeline include MadVine, a 100% plant-based, diet soda with zero calories, zero sugar and no artificial ingredients as well as Golden Wing, a grain-based milk alternative.
In the cannabis space, the company has expanded its partnership with Hexo Corp and formed a joint venture (Truss CBD USA) to explore opportunities for non-alcohol hemp-derived CBD (cannabidiol) beverages in Colorado. The two entities earlier formed a joint venture called Truss Beverages for the Canadian market to produce non-alcohol cannabis-infused beverages.
Following the company’s 2Q results announced in July, MKM Partners analyst William Kirk reiterated a Buy rating for Molson Coors with a price target of $59 and stated, “it is clear that the previously disclosed April 2020 performance (North America and Europe brand volume) were the worst numbers during this turbulent period. Given the relative under-performance versus the broader market, we expect Molson Coors to re-rate.”
However, recently Kirk lowered his price target to $55 while maintaining a Buy rating. (See TAP stock analysis on TipRanks)
The Street is on the sidelines about Molson Coors. A Hold consensus is based on 4 Buys versus 4 Holds and 2 Sells. The stock has fallen about 37% so far in 2020 and so the average analyst price target of $42.70 indicates an upside potential of 25% in the coming months.
The upside potential in Molson Coors stock is higher than Constellation Brands currently. However, Constellation Brands looks to be a better choice over the long-term as indicated by the Street’s consensus based on its impressive imported beer portfolio, focus on high-end beer, wine and spirits brands, and continued innovation.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment