Constellation Brands Sells Off as Investors Brace for Trade Turbulence with Mexico

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Acquisitions have made Constellation Brands (STZ)  the largest importer of Mexican beer, but the news of Donald Trump's victory in Tuesday's presidential election have investors worried about the president-elect's trade policies, including a potential NAFTA repeal.

While stocks were steady after volatile futures and premarket trading, Constellation shares plunged 8.1% to $153.08 in early trading Wednesday. The company will hold its Investor Day on Wednesday afternoon.

Bank of America/Merrill Lynch analyst Bryan Spillane downgraded Constellation to "Underperform" from "Buy" and lowered his price target to $150 from $195, citing "President-elect Trump's stance on trade and immigration (build a physical wall on the southern border with Mexico, renegotiate trade agreements, add tariffs/taxes, etc.)."

In 2013, Constellation paid $4.75 billion to acquire Grupo Modelo SAB de CV's U.S. beer business from Anheuser-Busch InBev SA/NV (BUD) . The deal included exclusive perpetual brand license in the U.S. to import, market and sell the Corona and the Modelo beer brands.

While a Trump administration's actual policy prescriptions are uncertain, any deterioration of trade relations between the U.S. and Mexico would weigh on Constellation. Spillane pointed out that in Constellation's 2016 fiscal year, ended February, its Mexican beer business accounted for 52.6% of net sales and 63.5% of profits."100% of STZ's imported beers are made in Mexico and imported into the U.S., and a Trump victory creates uncertainty for its future growth," he wrote. "Pre NAFTA the U.S. tariff on Mexican beer was 2%; Trump's campaign pledges to impose 35% tariffs on many goods from Mexico, a tariff that, if imposed, could alter STZ's present growth trajectory."

Constellation announced another major Mexican investment just last week. The Victor, NY-based company paid $600 million to buy the Obregon brewery from Grupo Modelo. Constellation said in a statement that the deal would allow the company "to immediately obtain functioning brewery capacity to support its fast-growing, high-end Mexican beer portfolio and provides flexibility for future innovation initiatives."

Although pollsters had largely discounted the possibility of a Trump presidency, Susquehanna Financial Group analyst Pablo Zuanic argued in a September note that his election would contribute a "meaningful and negative effect" to Constellation's sales through factors including tariffs and a reduction of Mexican immigration.

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