Buffett’s Berkshire Hathaway (NYSE: BRK) dives into deep value: Constellation Brands (NYSE: STZ)

Berkshire Hathaway (NYSE: BRK), the investment conglomerate run by Warren Buffett, generally opts for value investments.

That is surely the case with alcoholic-beverage giant Constellation Brands (NYSE: STZ), whose shares Berkshire purchased during the fourth quarter – 5.6 million of them, worth $1.2 billion as of year-end. It should be noted that Buffett reportedly doesn’t get personally involved with investments that small.

Constellation, which owns the US distribution rights for Mexican beers including Corona and Modelo, has a forward price-earnings ratio of 10.92. That’s way below its five-year average of 19.24, according to Morningstar. And the stock trades at a 30% discount to large-cap consumer staples stock, according to Barclays bank analysts.

Causes of concern

The stock got to those depressed valuations by dropping 32% over the last three months. Constellation faces several problems:

• Consumer demand for alcohol is down. Alcohol sales dipped 1% last year to $112 billion, according to NielsenIQ, as cited by Barron’s. Volume dropped by more, with declines hitting beer, spirits, and wine. Statistics show that drinking has particularly dropped among young adults, a key demographic for beer. That beverage accounts for 86% of Constellation’s revenue, with wine and spirits making up the rest.

• The US surgeon general has called for putting warnings on alcohol packages that consumption of the poison can help cause cancer.

• Donald Trump has threatened a 25% tariff on all Mexican products exported to the US.

• Constellation’s earnings have slumped. The company’s revenue was little changed in the quarter ended Dec. 31. Beer sales gained 3%, while wine and spirits sales slumped 14%. Also, management lowered its earnings outlook.

As a result, analysts cut their estimates for Constellation’s share price. Morningstar analysts put fair value for the stock at $274, down from $291 before the earnings report. The stock traded at $170 Tuesday. That obviously means Morningstar analysts see the stock as significantly undervalued. 

They note that the company sits atop the US beer market with a 60%-plus volume share, sports a well-respected brand and has tight relationships with its distributors. Modelo is the No. 1-selling beer in the US.

Other analysts too see Constellation’s share price as a bargain. “We struggle to wrap our heads around the 30% discount to large-cap staples when we see 2025 earnings-per-share growth of 6%, even with depressed beer category trends,” Barclays analysts wrote in a report.

So maybe Berkshire is on to something.

The author owns shares of Berkshire Hathaway.