It could be a dry summer for the bottom line of beer giant Constellation Brands (STZ) thanks to President Donald Trump.
Trump went through with his long-threatened tariffs on Mexico and Canada on Tuesday. Starting just after midnight, imports from Canada and Mexico will now be taxed at 25%.
This is bad news for the beer industry as more than 80% of US beer imports are estimated to come from Mexico. Companies in the sector are now faced with a one-two punch of raising prices, which could stunt demand, and increasing production costs.
Listen: Trump tariffs may trigger stagflationary shock
No beer player arguably has more at stake in Trump's trade war than Corona and Modelo maker Constellation Brands.
For starters, Modelo beers are exclusively brewed in Mexico. The company also imports Corona beer from Mexico. Each brand has seen strong sales in the past two years, helping to offset persistently weak sales in Constellation Brands' wine business.
Constellation Brands operates two breweries in Mexico, located in Nava, Coahuila, and Ciudad Obregón, Sonora. It's building a third in Veracruz.
Evercore analyst Robert Ottenstein estimates that about 99% of the company's beer is imported from Mexico.
"While we can’t speculate on the duration of the currently imposed tariffs, we continue to assess opportunities to help manage impacts to our business in the near and longer term to the extent we are able," Constellation said in a statement to chof360 Finance.
"Additionally, we continue to work with all levels of government in both the U.S. and Mexico to ensure the perspective of our business and key stakeholders are represented and considered in policy decisions, with the hope that this situation can be resolved quickly."
Recent research from Ottenstein projects a $3.50 per share hit to Constellation's earnings in a 25% Mexico tariff situation, without any offsets such as price increases, cost cuts, and stock buybacks. If Constellation is able to execute on some of these tariff offsets, the earnings hit could still be a lofty $2.40 a share.
Ottenstein is hopeful Constellation Brands won't see the worst-case profit scenario happen.
"We also note that we believe Constellation Brand would have the ability to have distributors help absorb some of the incremental costs, which is not contemplated in the below, nor are additional productivity programs," Ottenstein said.
Meanwhile, Constellation risks generating a lower-than-expected return on its latest capital investments should Trump's trade war go on.
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During fiscal year 2024, Constellation Brands spent over $900 million on expanding beer manufacturing capacity in Mexico while building the aforementioned new plant in Veracruz.
The company said in its latest annual report it expects to spend $3 billion from fiscal year 2025 through fiscal year 2028 to finish the Veracruz plant and expand Mexico operations.
The Veracruz plant's initial buildout phase is expected to be completed by late fiscal year 2026 or 2027.
"We're nearing the end of our large commitments as it relates to brewery expansion in Mexico," Constellation Brands CFO Garth Hankinson said on a January earnings call when asked if Constellation would scale back investments in the country given the economic climate.
The company didn't entirely rule out dialing down expansion plans in Mexico.
Watch: Trump tariffs may drill retailers
Ultimately, the tariff news couldn't come at worse time for Constellation Brands.
Despite getting a boost in February from a disclosure that Warren Buffett's Berkshire Hathaway (BRK-B) has taken a stake, Constellation's stock is down 21% year to date. Shares are down 30% in the past year.
Shares were hammered in January as the company missed sales and earnings estimates and cut guidance.
The stock trades on one of the lowest forward price-to-earnings multiples in the beverage industry at 11.7 times, according to chof360 Finance data.
Other forward P/E multiples of similar companies:
Coca-Cola (KO): 25 times
PepsiCo (PEP): 18.5 times
Keurig Dr Pepper (KDP): 16.8 times
Anheuser-Busch InBev (BUD): 16.6 times
Diageo (DEO): 15 times
Molson Coors (TAP): 9.6 times
"We continue to expect Constellation to be a secular market share winner, yet we are cognizant of the persistent headwinds to the beer and broader alcohol category, leading to reduced alcohol consumption. Risk from Mexican beer import tariffs and potential implications to consumption from tighter immigration policy," said JPMorgan analyst Andrea Teixeria following the company's latest earnings.
Teixeria slashed her rating to Neutral from Overweight.
Brian Sozzi is chof360 Finance's Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email [email protected].
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