To The Moon

Constellation Brands has chosen the least fashionable strategy in modern markets: deliberate contraction. In an era obsessed with growth-at-any-cost, STZ is doing the opposite — and quietly improving the equity in the process.

Shrinking the structure to reveal what actually compounds

When Less Starts Pulling Its Weight

The consensus looks at Constellation’s mid-single-digit organic sales decline and reaches for familiar diagnoses: fading relevance, demographic decay, or strategic drift. I see something far more intentional. This isn’t erosion; it’s excision. $Constellation(STZ)$ is performing surgery on itself — and the patient is thriving on the operating table.

The divestment of lower-margin wine and spirits assets, including SVEDKA and further wine exits planned through 2025, looks reckless if revenue growth is your lodestar. If, however, your north star is per-share economics, the logic sharpens quickly. Constellation is cannibalising its own revenue to isolate a far more profitable core.

What remains is a premium import beer franchise anchored by Modelo and Corona, with gross margins north of 50% and operating margins approaching 34%. That profile is structurally superior to most global beverage peers chasing volume in increasingly commoditised categories. This is not a beverage conglomerate in retreat; it is a specialist refocusing on return on capital rather than litres sold.

In plain English, Constellation is choosing to sell less — but earn far more from what remains.

Pruning for a New Drinking Class

This pruning strategy only makes sense if premium demand is durable. That’s where Gen Z quietly enters the picture earlier than most investors expect.

The reflexive bear case claims younger consumers are abandoning alcohol altogether. The data tells a more inconvenient story. Gen Z isn’t sober; it’s selective. Consumption volumes are down, but spend per occasion is up, funnelled toward brands that signal identity and status.

Constellation holds roughly double the Gen Z share of the broader alcohol market. Modelo Especial has become a cultural marker rather than just a beer, while premium wine labels like The Prisoner cater to occasion-based spending rather than habitual consumption. This matters because the industry is bifurcating: premium import brands with pricing power on one side, mid-tier domestic brewers fighting for relevance on the other.

Constellation didn’t stumble into this positioning. It is actively shedding assets that don’t speak to this consumer, which explains why shrinking revenue is not a sign of strategic confusion, but of clarity.

The Per-Share Math Most Investors Still Miss

Here’s where the market continues to misread the story. Constellation’s income statement looks anaemic, but its per-share economics are quietly improving.

Levered free cash flow sits near $2bn against a market capitalisation of roughly $27bn. Management has shown little interest in redeploying that cash into empire-building acquisitions. Instead, it’s flowing back to shareholders through a dividend yield of about 2.6% and steady buybacks.

The result is a business with fewer brands, higher margins, and more predictable cash flows per share. That combination rarely makes for exciting headlines, but it compounds remarkably well. Investors fixated on top-line growth are mistaking intentional pruning for accidental decay — and missing the arithmetic underneath.

Negative growth, in this case, is positive alpha.

Volatility fades; disciplined cash flows quietly reassert themselves

Buffett Isn’t Betting on Tariffs — He’s Betting on Scarcity

Markets are currently paralysed by fears of aluminium tariffs and renewed trade friction with Mexico. It’s a convenient narrative, particularly after a near-35% drawdown from Constellation’s highs. $Berkshire Hathaway(BRK.A)$, characteristically, appears unmoved.

This is not a macro call. It’s a moat call.

Constellation holds perpetual, exclusive rights to import and distribute key Mexican beer brands in the US. That’s toll-bridge economics disguised as a drinks company. Tariffs may dent margins at the edges, but they don’t dissolve brand equity or invite new competitors through the gate.

At roughly 12.5x forward earnings, the market is pricing cyclical fragility into a business with structural scarcity value. Tariff anxiety dominates the headlines; capital allocation discipline does the real work in the background.

Narrative noise compresses price; structure quietly holds

Competing on Hope Versus Permission

Against peers like $Anheuser-Busch Inbev SA(BUD)$ and $Molson Coors(TAP.A)$, Constellation’s strategy looks almost contrarian. While others chase scale and operational leverage, Constellation chases scarcity and margin.

Its operating margin of nearly 34% dwarfs most global brewers. Its US-centric focus reduces exposure to emerging-market volatility. And its brands compete on permission rather than promotion. Competitors are forced to discount; Constellation raises prices and watches demand hold.

The trade-off is concentration. Modelo looms large. But I’d argue brand concentration is less dangerous than geographic sprawl in a category where loyalty matters more than novelty.

Debt Isn’t the Villain of This Story

The $10.7bn debt load gets headlines, but against $2.7bn in annual operating cash flow and modest capital intensity post-divestment, it’s structural rather than speculative.

Yes, leverage is elevated. But this is a business with predictable demand, strong pricing power, and improving focus. Enterprise value sits around $37bn, implying an EV/EBITDA multiple near 15x — not cheap, but defensible for a cash-generative franchise with durable brands.

The real question isn’t whether $Constellation(STZ)$ can service its debt. It can. The question is whether management maintains discipline. So far, that discipline has been the defining feature of this strategy.

Owning the bridge matters more than widening the road

Shrinking the Empire, Growing the Claim

Constellation Brands is not a growth story in barrels shipped or shelves stocked. It is a capital reallocation thesis — fewer assets, higher margins, heavier buybacks, and rising per-share value.

At 12.5x forward earnings, STZ offers defensive cash generation priced like a melting ice cube. That mispricing exists because revenue optics obscure improving economics, tariff noise drowns out capital discipline, and contraction still feels like failure in a market trained to worship expansion.

I’m comfortable taking the other side. In a market obsessed with volume, Constellation is quietly optimising ownership — and that, over time, tends to be the most profitable form of progress.

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