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Can Constellation Brands’ Beer Business Continue Its Strong Run?

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Strong beer portfolio

Constellation Brands’ (STZ) performance in recent quarters has been driven by the strong performance of its beer business. Constellation Brands is the third-largest beer maker in the US market, trailing Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP). Molson Coors is the second-largest brewer in the United States through its MillerCoors joint venture with SABMiller (SBMRY) (SAB.L).

In terms of the imported beer market in the United States, Constellation Brands occupies the top position with a strong portfolio of Mexican beers that includes Corona Extra and Modelo Especial.

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Impressive performance

In fiscal 2016, which ended on February 29, 2016, Constellation Brands’ beer business accounted for 55.3% of the company’s sales, up from 52.9% in fiscal 2015. The company’s wine and spirits accounted for 39.6% and 5.1%, respectively, of the company’s fiscal 2016 sales. The company’s beer sales in fiscal 2016 increased by 13.6% to $3.6 billion, driven by higher volumes within the company’s Mexican beer portfolio, the impact of pricing in select markets, and sales contributions from the Ballast Point acquisition.

In fiscal 2016, Corona Extra alone sold more than 117 million cases. The brand’s strong performance in fiscal 2016 was driven by distribution of key packages, marketing and merchandising efforts, and growth of the can format.

Growth potential

Constellation Brands is expanding its beer production capacity to meet the growing demand for its imported beer brands. The company’s first 5-million-hectoliter production increase at the Nava brewery is now operational, and the company aims to achieve 20 million hectoliters of functioning brewing capacity by the end of 2016. Constellation Brands is also aiming for completion of an additional 7.5 million hectoliters of production capacity at the Nava brewery from 20 million hectoliters to 25 million hectoliters by the summer of 2017. Further, the company expects to expand capacity from 25 million hectoliters to 27.5 million hectoliters by early 2018.

The iShares U.S. Consumer Goods ETF (IYK) has 1.2% exposure to Constellation Brands.

In January 2016, the company announced the construction of its Mexicali brewery, which will provide 10 million hectoliters of production capacity and may be expanded to 20 million hectoliters of capacity in the future.

Constellation Brands is also focusing on strengthening its position in the high-end segment of the US beer market. Constellation Brands is looking for opportunities in the fast-growing craft beer category. The company’s $1 billion acquisition of craft brewer Ballast Point was a major step in this direction.

Continue reading for a discussion of Constellation Brands’ margins.

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