STZB Constellation Brands, Inc.(Class B)

By Jennifer Maloney 

Taking control of one of Mexico's best-known exports, Corona beer, has boosted sales and profit at Constellation Brands Inc. as the pale lager steals drinkers from U.S. brands like Budweiser.

But on Friday Constellation shares fell about 6% amid investor fears that President Trump's tariff threats against Mexico could end up hitting the brewer's bottom line.

Corona and the company's other beer brands, nearly all of them imported, account for 75% of Constellation's annual sales, according to Morgan Stanley analyst Dara Mohsenian. The company's Mexican imports also include Pacífico and Modelo Especial beers and Casa Noble tequila.

Constellation in 2013 took over a brewery in Nava, Mexico, and U.S. distribution of Corona and Modelo from Anheuser-Busch InBev SA in a $5.3 billion deal. Since then, Constellation has invested heavily in Mexico, expanding its Nava operations, buying a second brewery in Obregon -- now undergoing expansion -- and building a new $1.4 billion brewery in Mexicali.

Although escalating tariffs would pressure Constellation's profit margins, the impact could be softened by a weaker peso, price increases for its beers and changes to the brewer's supply chain, analysts said. A 5% tariff would create a 3.8% drag on Constellation's earnings, while a 25% tariff would create a 19% earnings headwind, Mr. Mohsenian wrote in a note Friday.

Constellation, which also sells Ballast Point craft-style beer and Robert Mondavi wines, didn't respond to requests for comment Friday.

In 2017, when Republicans in Congress were proposing to increase taxes on Mexican imports, Constellation executives said they would consider buying more natural gas and packaging materials in the U.S. to decrease the company's tax bill. That tax proposal wasn't adopted.

The company could deploy the same plan to minimize tariffs in this case, sourcing more materials such as glass in the U.S., said Nik Modi, an analyst at RBC Capital Markets. The brewer could also raise prices for its Corona and Modelo beers without significantly hurting volume for the popular brands, he said.

Rival brewer Heineken NV imports Tecate and Dos Equis from Mexico, and those brands account for 45% of the company's U.S. volume, according to Bernstein analysts. However, the profit impact would be less because those beers are sold at a lower price than the brewer's European imports.

AB InBev imports two Mexican brands, Montejo and Estrella Jalisco, but their contribution to the Budweiser brewer's volumes isn't meaningful, Bernstein says. AB InBev's business is more exposed if an escalating trade fight damages the Mexican economy and hurts beer consumption in Mexico. AB InBev sells Corona outside the U.S., including Mexico.

Heineken's stock fell 3% Friday, while AB InBev shares lost 2% in Europe.

Write to Jennifer Maloney at jennifer.maloney@wsj.com

(END) Dow Jones Newswires

May 31, 2019 14:17 ET (18:17 GMT)

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