Constellation Brands Has 'Very Real' Beverage Production Risks, MKM Says In Downgrade

Certain beverage brands and pack sizes from Constellation Brands, Inc. STZ are already facing availability issues, and the company's number of products out of stock could increase through June, regardless of Mexico’s decision to permit production, according to MKM Partners.

The Constellation Brands Analyst

William Kirk downgraded Constellation Brands from Hold to Sell and reduced the price target from $216 to $147.

The Constellation Brands Thesis

Out-of-stock issues are unlikely to improve until 40 days after Constellation Brands decides to increase brewing capacity, since that’s is how it takes to brew and ship most of its beers, Kirk said in the Friday downgrade note. 

Even if increased production begins May 18, out-of-stock issues will start getting resolved by June 27, the analyst said. "A very real risk” exists of increased production not beginning May 18, he said. 

Mexico has pushed the date back once and has now said that businesses can resume only in areas with no COVID-19 cases, Kirk said. Constellation Brands does not have production facilities in these regions, the analyst said, adding that package availability remains tight.

In the event the company is unable to increase production by mid-May, availability issues may extend into July and to more brands and pack sizes, he said. 

Demand decelerated meaningfully in April from the levels seen in March, Kirk said. 

“From both a supply and demand perspective, optimism that STZ can continue its growth trajectory is misplaced." 

STZ Price Action

Shares of Constellation Brands were down 0.21% at $164.42 at the time of publication Friday. 

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