Morgan Stanley on Constellation Brands (STZ): 'Concerns Overblown'

August 9, 2022 6:58 AM EDT
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Morgan Stanley on Constellation Brands (NYSE: STZ): 'Concerns Overblown'

Analyst Dara Mohsenian comments "STZ closed -3.9% (vs S&P 500 -0.1%) following a Bloomberg article with the headline"Mexico Should Stop Making Beer in Drought-Plagued North, AMLO Says." We acknowledged there is a drought situation and political risk is a wildcard, but after checking in with Constellation Brands,as well as Heineken and ABI (both covered by Pinar Ergun),and reading a translation of the press conference, we are comfortable that his comments were actually a reiteration of existing policy that there will not be new breweries in the North, but in the Southern region, similar to Constellation's prior decision to scrap its plans for a brewery in Mexicali in the North and moved production plans to the South (Veracruz). This viewpoint is reinforced by the article citing President Lopez Obrador mentioning Constellation as "an example of what policy for one of Mexico’s main industries should look like." Again, the key point is all three companies believe there has been no change to production plans in the North, and that the President's statement was actually meant to reinforce existing policy that there will be no new water concessions in the North. Our sense is that the companies have checked in with the government post the comments, and that companies are working proactively with the government to address water concerns (see STZ comments below). That being said, there is a drought situation,and a political situation, so there is some level of risk and the situation remains fluid;however again we think this has already been addressed by the companies.Were main OW STZ, and are encouraged by recent better than expected scanner data, reinforcing our call for near-term (and long-term) beer revenue growth upside."

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