STZ Constellation Brands Inc

By Mike Esterl 

Investors cheered after Constellation Brands Inc. acquired the U.S. rights to Anheuser-Busch InBev NV"s fast-growing Mexican beers in a $5 billion-plus deal in 2013.

On Wednesday? Not so much.

Shares in Victor, N.Y.-based Constellation were 8.3% lower at $152.76 in early afternoon trade on concern a Donald Trump presidency could hurt the largest U.S. distributor of Mexican beer, including Corona, the country's top-selling import.

In addition to selling Mexican brands, Constellation also owns beer manufacturing in Mexico and is in the midst of a $4 billion-plus expansion push south of the border. On Oct. 31, it announced it would pay $600 million to acquire another brewery in Mexico to meet rising U.S. demand.

All of that leaves it vulnerable to a potential tightening of cross-border trade. Mr. Trump threatened during the presidential campaign to leave the North American Free Trade Agreement, which connects Canada, the U.S. and Mexico, if Mexico doesn't agree to renegotiate the pact.

Constellation booked $6.55 billion in revenue for the fiscal year ended Feb. 29, 2016. Of that, $3.62 billion came from beer, almost all of it from Mexico. The company also sells wine and liquor and has a stock market capitalization of about $31 billion.

Mr. Trump also vowed during his campaign to build a wall along the Mexican border and deport millions of undocumented Mexicans from the U.S., which could further crimp Constellation sales. Roughly a third of Corona drinkers are Hispanic, estimates Vivien Azer, a beverage analyst at Cowen and Co. Modelo Especial, the company's fast-growing No. 2 Mexican import, skews about 60% Hispanic, she estimates.

Constellation Chief Executive Rob Sands said at an investor conference Wednesday in New York it is "way too early" to know how a Trump administration will affect Mexican trade and immigration.

He added Mr. Trump's election won't affect Constellation in the short term but Republican control of Congress and the White House should be "good for business in general" and for the company in areas such as taxation and repatriation of profits.

Some analysts said Wednesday's selloff is overdone and that Trump the president could have different policies than Trump the candidate when it comes to trade.

"NAFTA is not going to get renegotiated in three quarters," said Nik Modi, a beverage analyst at RBC Capital Markets. He has a "buy" recommendation and $183 price target on the stock.

Mark Swartzberg, an analyst at Stifel, wrote in a research note that Mr. Trump's focus has been on manufacturing moving to Mexico from the U.S., not on beer that has always been brewed in Mexico.

"Moreover, a tax on beer is a tax on a staple among American voters, for a president vowing to cut corporate tax rates and strengthen the U.S. economy," wrote Mr. Swartzberg. He has a "buy" rating on the stock with a $189 price target.

Still, Bank of America slashed its recommendation on Constellation shares to "underperform" from "neutral" and cut the price target to $150 from $195.

Despite Wednesday's selloff, Constellation's share price has risen 16% over the past 12 months, largely fueled by rapid sales growth in its Mexican beer brands, which also include Pacifico and Victoria.

U.S. imports of beer from Mexico rose 15% to 531.9 million gallons in the first nine months of 2016, according to the Beer Institute, an umbrella group for U.S. brewers. Mexico represented 67% of U.S. beer imports, which rose 7.4% overall.

Dutch brewer Heineken NV is the second-largest seller of Mexican brands in the U.S., including Dos Equis and Tecate. But Mexican beer represents a much smaller part of Heineken's overall business than Constellation.

Write to Mike Esterl at mike.esterl@wsj.com

(END) Dow Jones Newswires

November 09, 2016 14:33 ET (19:33 GMT)

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