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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.
"We realize some risks are so terminal but so remote that they cannot be priced in, but we are puzzled by how immune STZ shares have been to the increasing probability of a Trump presidency," he wrote. "Perhaps the market is right, and the probability of all this playing out is as low as a meteor hitting Earth."
According to Zuanic's estimates, Latinos account for up to 60% of Constellation's beer business, and Constellation could lose 12% of its customer base if, as promised, Trump deports 11 million undocumented immigrants. In addition, the move would erode brand value.
"Regardless of one's opinion or conjectures, the deportation of 11 million people (estimated to be 117 times the internment of people of Japanese descent after Pearl Harbor), plus family members that would follow, would likely be a rather traumatic and divisive event, and in that context it is hard to envision 'taco trucks' being as inviting, or for that matter Mexican beer brands," he wrote. "A damaged brand Mexico could not be good for Corona Extra or Modelo Especial."
All told, Zuanic estimated, Constellation's earnings could fall up to 30% between core base decline, brand erosion and lower expected future growth as the stock would "no longer would be a play on demographics." Zuanic declined to comment today.
RBC Capital Markets analyst Nik Modi was more optimistic, recommending that investors keep buying Constellation in the event of a Trump victory.
"If STZ shares sell-off on Wednesday on a Trump victory, we would encourage aggressive buying on any dips as we believe fundamentals are unlikely to change as re-negotiating NAFTA (if at all) will likely take some time," he wrote Monday.
Additionally, Constellation has augmented its premium offerings through an aggressive acquisition strategy. In the past twelve months, Constellation paid $120 million for Charles Smith Wines's five premium wine brands, $160 million for craft whiskey maker High West Distillery $285 million for Prisoner Wine Co. and $998.5 million for craft brewer Ballast Point Brewing Co.
A Constellation spokeswoman did not respond to a request for comment.