Constellation Brands (tkr: STZ) is a leading international alcoholic beverage company with sales of just over $7 billion. It is the third largest producer and marketer of beer (particularly imported and craft brews) for the US market and the world’s leading premium wine company. It is also expanding into the premium craft spirits market. Constellation Brands is focused on “premiumization” of its product portfolio to drive growth. We believe Constellation Brands will succeed because the consumption of high-end beer, wine and spirits is outpacing the broader markets for each of these categories, driven primarily by millennials. Strategically, Constellation Brands uses its sales organization, expertise in execution and strong distribution network to take smaller premium brands and grow them substantially. We like Constellation Brands’ domestic exposure—ninety percent of the company’s sales are in the US—because we believe the US economy will continue to do well.

Beer accounts for 55% of Constellation Brands’ sales, wine accounts for 40% and spirits account for 5%. Key beer brands include Corona, Modelo and Pacifico. In the U.S., Constellation Brands has five of the top-selling fifteen imported beer brands, representing 8% of the market. The recent acquisition of Ballast Point, a craft brewery located in San Diego, provides a high growth premium platform for competing in the fast-growing craft beer category. Ballast Point makes over 80 different craft beers in various styles, including stouts, porters and lagers. Among the well-known wine brands owned by Constellation Brands are Prisoner, Meiomi, Clos du Bois, Estancia, Franciscan, Wild Horse, Simi and Mondavi. Constellation Brands recently purchased High West Distillery, which will expand its premium spirits portfolio to include bourbon and rye in addition to Svedka vodka, Casa Noble tequila, and Black Velvet Canadian whiskey.

Constellation Brands is making a major investment in new beer production facilities, which will be completed by 2021. Its brewery capacity is currently at 50% of what it sells and it is outsourcing the balance of its production to InBev. The company’s debt-to-capital ratio sits at 50% due to this $4.5 billion investment. Constellation Brands’ CEO is Robert Sands and the board chair is his brother, Richard. Both are sons of company founder Marvin Sands, but the rest of senior management and the board are outsiders. Management has recently initiated a dividend, indicating confidence in the company’s performance.

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