Constellation Brands Inc. (NYSE: STZ), distributor of best-selling beer Modelo, fell flat after the company’s second-quarter earnings report on October 5. 

Despite raising its fiscal 2024 earnings outlook, and reporting double-digit increases in beer division sales, investors smacked the stock for weakness in the wine and spirits unit. 

Earnings grew by 17% to $3.70 a share.

A glance at the Constellation Brands chart shows a 9.30% share price decline in the past month. The stock appears to have found a floor above its October 6 low of $233, which indicates that institutional investors believe the stock has reached a price level where it is undervalued or attractive, prompting investors to hold or buy.  

Both earnings and revenue growth increased sequentially in the past quarter, as its Modelo brand, in particular, has been taking market share from Anheuser-Busch InBev SA/NV (NYSE: BUD).

While Anheuser-Busch’s problems have been well-documented, its sales of flagship brand Bud Light stabilized in recent months, making Modelo’s gains even more impressive. Modelo Especial surpassed Bud Light as the bestselling beer in the U.S. earlier in 2023.

Constellation Outperforming Industry Rivals

While Constellation Brands has eked out a year-to-date gain of 2.55%, Anheuser-Busch stock is down 11.12% so far this year. 

Another big competitor is Diageo plc (NYSE: DEO), whose stock is down 12.65 % year-to-date. Diageo’s brands include Johnnie Walker, Tanqueray, Smirnoff, Guinness and Bailey’s. 

Highlights of Constellation’s most recent report included: 

• The company’s beer business was the top share gainer in market dollars for a ninth consecutive quarter, and now owns six of the top 15 share-gaining beer brands.
• Modelo Especial remains the top brand-share gainer and the top-selling brand in the U.S. 
• Modelo Chelada brands continue to be the #1 chelada in the U.S. beer market, holding nearly 70% market share of the entire chelada segment. In case you’re wondering, chelada is a beer-based, Mexican-inspired cocktail. 
• Corona Extra is the No. 3 high-end beer brand.
• Pacifico remains the No. 7 share gainer in the high-end beer market.

That’s a pretty impressive set of drivers, which accounts for MarketBeat’s Constellation Brands analyst ratings showing a consensus rating of “moderate-buy” with a price target of $277.64, an upside of 16.70%.

If the stock were to reach that price level, it would mean rising above its August 8 high of $273.65, and clearing its current consolidation. 

Boosted Earnings Outlook

In the most recent earnings report, Constellation Brands raised its earnings outlook for fiscal 2024 to a range between $12 and $12.20 a share. That’s higher than earlier estimates of $11.70 to $12 per share. 

That’s also higher than Wall Street’s forecasts of $11.72 per share. That forecast was recently increased to $11.89 a share, an increase of 12%. For fiscal 2025, analysts see the company earning $13.48 a share, an increase of 13%.

The weakness in the wine and spirits division was worrisome to investors because the company is the world’s largest wine producer. Sales from that business unit fell 14% in the second quarter to $444.1 million, down from $515.8 million in the year-earlier quarter.

Its wine brands include Kim Crawford, Meiomi, Robert Mondavi and Ruffino. On the spirits side, brands include Casa Noble tequila and Svedka vodka. 

Lower Demand For Mass-Market Brands

In the earnings conference call, Constellation Brands’ CEO Bill Newlands said the wine and spirits unit’s mass-market brands are contending with lower demand as consumers turn toward premium brands. That’s a trend that began before the second quarter, and is continuing. 

While that’s happening, the company is focusing on the not-so-glamorous side of the alcohol business, such as lowering operational costs.

In the recent earnings conference call, chief financial officer Garth Hankinson cited examples such as double-stacking railcars and the use of plastic pallets, optimizing the location of inventory. The company is also better managing its acquisition of raw materials through improved contracts.