Does Constellation Brands Have A Hard Seltzer Problem?

The hard seltzer alcohol market has exploded over the last year and could expand to a $2.5 billion market by 2021 and Constellation Brands, Inc. STZ could see part of its beer portfolio negatively impacted from the growing category, according to UBS.

The Analyst

UBS analyst Sean King maintains a Neutral rating on Constellation Brands with a $212 price target.

The Thesis

Hard seltzer beverages are showing three clear signs of growing momentum, King wrote in a note:

1. Nielsen trends accelerated from June to July
2. Boston Beer Company Inc SAM said it's expanding capacity and other rivals are likely to follow suit.
3. Recent new Seltzers entered the market at lower price points, including Natural Light, Pabst and Four Loko.

King said one of the primary share losers is likely to be sessionable Mexican Imports, including Constellation's Corona brand. The impact to Constellation Brands may be overblown as Modelo has been the company's best performing beer brand.

If Corona sales remain flat, King said Modelo will need to sustain its current high-teens growth profile over the coming three years to maintain a high-single-digit total beer growth profile. As such, the risk to Constellation is "modest" based on recent innovation success at Modelo and the ongoing strength of the brand despite growth in the new Hard Seltzer category.

Price Action

Shares of Constellation Brands traded around $202.52 at time of publication.

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