Analyst: Constellation Worth Buying Despite Political, ESG Risks

Constellation Brands, Inc. STZ sunk nearly 30 percent in 2018, and although political and environmental threats persist, one analyst expects no further depreciation.

The Analyst 

HSBC analyst Carlos Laboy upgraded Constellation from Hold to Buy rating with a $206 price target. 

The Thesis

By most accounts, the alcoholic beverage manufacturer is navigating rough waters.

“Constellation Brands faces rising risks in its core beer business which threaten to stall much-needed capacity expansion,” Laboy said in a Friday note. 

Regional water scarcity and local protests jeopardize Constellation's brewery construction in Mexicali, the analyst said. 

The firm lacks federal water permits for the project and insists its state permits for the national resources suffice, he said. Legislation has been drafted to reprioritize water rights, which could further limit industrial access and thwart Constellation’s regional plans, according to HSBC. 

To complicate matters, a ballot initiative to block brewery construction could entangle Constellation in the region’s June gubernatorial election, Laboy said. 

“If it is seen to oppose a democratic referendum without elevated concern for community issues, it could create a damaging narrative and delay needed capacity a few years." 

The risks may already be priced into HSBC’s sum-of-the-parts bear case, and HSBC said the lingering concerns can be overcome. 

“STZ could push the reset button by processing more clean water to farmers than it uses,” Laboy said.

“It could also improve its water intensity rate, which was reported at 3.19 liters of water per liter of beer in FY17.”

An analysis of discounted cash flow suggests 28-percent upside, according to HSBC. 

Price Action

Constellation Brands shares were up 2.43 percent at $170.67. 

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