Constellation Brands (STZ) investors were left reeling after the company's third quarter fiscal 2025 earnings report, which missed expectations and led to a double-digit stock drop. As we digest the results and analyze the strategic moves Constellation Brands can make to improve its wine portfolio's performance, we must question whether the stock still belongs in our portfolios.



Constellation Brands' stock price slumped after the company reported its third quarter fiscal 2025 financial results on January 10, 2025. The post-earnings slump can be attributed to several specific factors:

1. Lowered fiscal 2025 guidance: The company lowered its fiscal 2025 earnings per share (EPS) guidance, which disappointed investors. The new guidance range was $13.50 to $13.80, compared to analysts' average estimates of $13.42 per share (Reuters, 2024).
2. Weak wine sales: Constellation Brands' wine sales were weak, with net sales declining 6% in its wines and spirits business. Wholesalers across international markets cut back on orders for its high-priced premium brands (Reuters, 2024).
3. Higher interest payments: The company's $4 billion investment in Canadian cannabis producer Canopy Growth Corp. led to a $55 million increase in interest payments, which negatively impacted earnings (Constellation Brands, 2025).
4. Higher marketing expenses and transportation costs: Increased marketing expenses and transportation costs also contributed to the earnings miss (Constellation Brands, 2025).
5. One-time issue with glass at a bottling plant: A one-time issue with glass at one of the brewer's bottling plants in Mexico also affected beer margins (Constellation Brands, 2025).

These factors combined led to a double-digit stock drop, with shares falling to $150.95 on January 9, 2025, before recovering to $159.93 on January 10, 2025 (Constellation Brands, 2025).



Post-earnings, analysts' opinions on Constellation Brands' future prospects have evolved, with some maintaining a bullish stance while others have expressed concerns. Here's a breakdown of analysts' views:

1. Bullish Stance:
- Morgan Stanley equity analyst Dara Mohsenian maintained an "overweight" rating on Constellation Brands shares, stating, "We view the stock price reaction as overblown given already cheap valuation to begin with and our thesis around the sustainability of beer revenue growth remains intact." (Source: Jan. 10, 2025 note to clients)
- Morningstar equity analyst Sonia Vora said, "We expect longer-term sales growth to remain at 6% and an average operating margin to remain in the mid-30s as a percentage of sales. The company's share price offers a 'compelling entry point for investors.'" (Source: Jan. 9, 2025 research note)
- Wells Fargo Senior Analyst Bonnie Herzog suggested that a potential sale of the underperforming, low-margin wine portfolio could lead to accretion in earnings in the years ahead. (Source: Jan. 9, 2025 note to clients)

2. Concerns and Cautious Stance:
- SunTrust Robinson Humphrey's William Chappell Jr. expressed concerns about Constellation Brands' wine shipments, stating, "Constellation is in line to ship less wine to distributors than distributors send to retailers in the fourth quarter and shipments could trend down further if Constellation does not find a buyer for the cheaper wines dragging on overall sales." (Source: Jan. 9, 2025 research note)
- Chappell also raised concerns about the Canopy Growth investment, noting that the lack of clarity on the business and potential downward earnings revisions could "hamper" Constellation's valuation. (Source: Jan. 9, 2025 research note)

In summary, while some analysts remain optimistic about Constellation Brands' future prospects, focusing on the company's beer business and potential improvements in its wine portfolio, others have raised concerns about the wine shipments and the Canopy Growth investment.

To improve its wine portfolio's performance, Constellation Brands can consider the following strategic moves:

1. Divestment or Sale of Lower-Priced Wine Brands: Constellation Brands executives have mentioned exploring options for the company's lower-priced wine portfolio, including a sale. This move could help the company focus on its higher-margin and more successful brands, such as The Prisoner Wine Company, Robert Mondavi Winery, and Meiomi. Wells Fargo Senior Analyst Bonnie Herzog has suggested that a sale could be EPS dilutive in the first year but potentially accretive in the years ahead (Source: Jan. 9 note to clients).
2. Investment in Premium Wine Brands: Constellation Brands can allocate more resources to its premium wine brands, such as Kim Crawford and Meiomi, which have shown stronger performance. By investing in marketing, distribution, and innovation for these brands, the company can drive growth and increase market share in the premium wine segment.
3. Diversification and Innovation: Constellation Brands can explore new product categories or formats within the wine segment to cater to evolving consumer preferences. For example, the company could introduce new wine styles, flavors, or packaging options to attract younger consumers or tap into emerging trends, such as canned wine or low-alcohol options.
4. Improving Distribution and Supply Chain: Constellation Brands can work on optimizing its distribution and supply chain to ensure that its wine products reach consumers more efficiently. This could involve negotiating better terms with wholesalers, improving inventory management, or streamlining production processes to reduce costs and increase profitability.
5. Strengthening the Wine Portfolio through Acquisitions: Constellation Brands can consider acquiring or partnering with other wine brands or producers to bolster its wine portfolio. By acquiring successful wine brands, the company can expand its market reach, gain access to new distribution channels, and benefit from economies of scale.

By implementing these strategic moves, Constellation Brands can work towards improving the performance of its wine portfolio and driving long-term growth for the company.

As investors, we must weigh the potential risks and rewards of holding Constellation Brands stock in our portfolios. While the company's beer business remains strong, the challenges in its wine portfolio and the concerns surrounding the Canopy Growth investment warrant careful consideration. By staying informed and monitoring the company's progress, we can make more informed decisions about whether to keep the stock in our portfolios.