What higher tariffs may mean for Modelo and Corona
US President-elect Donald Trump has threatened a 25% tariff increase on Mexican products, as you’re undoubtedly aware.
Beer company Constellation Brands (NYSE: STZ) represents a poster child for the impact of such a move on US companies selling Mexican products.
To be sure, there’s a good chance that Trump’s threat is just a negotiating ploy. There may be no tariff increase on Mexico. And even if there is, it may be far lower than 25%. But it’s interesting to look at the potential effect of a 25% rise in any case.
If you aren’t familiar with the Constellation, you’ve likely heard of the Mexican beers it sells in the US – Modelo, Corona and Pacifico.
Those brands make Constellation No. 1 in the US premium import beer space, with a market share of more than 60%. Modelo is the top seller of any beer in the country. Beer accounts for 86% of Constellation’s sales, and it all comes from Mexico.
Impact of a tariff hike
If there’s a 25% tariff increase, it could affect Constellation in a number of ways. The bearish case is that the company would have to raise prices on its beers, and that would push customers away, hurting earnings.
The bullish case is that Constellation could implement price increases without driving customers away. These are premium beers, so customers are used to paying up for them. Perhaps revenue would rise. And if Constellation can cut its expenses, that could support earnings.
Also, Trump has called for a reduction in the top corporate tax rate to 15% from 21%. Taking 3 percentage points off Constellation’s fiscal 2024 (ended Feb.29) tax rate of 4.6% would have decreased its total tax obligation to $158 million from the actual total of $457 million. That $158 million in tax savings would have increased profit by 40% to $550 million.
Tariffs aside, many analysts have positive views of Constellation. Of 25 analysts tracked by The Wall Street Journal, 21 rate the company as “buy” and four as “hold.” Of course, Wall Street analysts are notoriously over-bullish, but not all of them.
The bullish case for Constellation
These bulls laud Constellation for the quality of its beers and its effective marketing campaigns. It has grown beyond its Hispanic base and boosted the number of retailers, bars and restaurants that sell its products.
Constellation’s beer sales gained 6% in the quarter ended Aug. 31 from a year earlier, and the company expects beer sales growth of 6% to 8% in the year ending Feb. 28.
The company’s forward price-earnings ratio looks attractive at 14.31, compared to its five-year average of 19.55, as calculated by Morningstar.
If Constellation can avoid getting hammered by tariffs, it would seem to have a rosy future. Morningstar analyst Dan Su puts fair value for the stock at $291, compared to Friday’s quote of $221.
