Beer Pair Trade? Why Boston Beer Could Be Riskier Than Constellation Brands

June 25, 2015

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Beer Pair Trade? Why Boston Beer Could Be Riskier Than Constellation Brands

A new report by Susquehanna analyst Pablo Zuanic focuses on two big-name alcoholic beverage stocks: Constellation Brands, Inc. (NYSE: STZ) and Boston Beer Co Inc (NYSE: SAM). Although Susquehanna currently has Neutral ratings on both stocks, the firm sees more downside risk to Boston Beer.

Cider Weakness

Cider sales have been decelerating so far this year, and Zuanic believes that this trend may have negative repercussions for Boston Beer when it comes to its Q2 earnings report. The company’s Angry Orchard product currently has a 55 percent share of the cider market and represents about 40 percent of Boston Beer’s sales.

According to Zuanic, cider weakness may ultimately lead to a cut to Boston Beer’s volume growth guidance. The company barely met the low end of its 8-12 percent volume guidance in Q1, and extrapolation of June data implies only mid-single-digit growth.

Sales Growth At Constellation

The success of Modelo Especial is one of the main drivers of Constellation’s consistent 20-percent sales growth. Despite a hefty valuation at its current share price, Zuanic believes that Constellation currently has more room for upside than downside in the near term.

Stock Outlook

While Boston Beer’s stock is down 14 percent year-to-date (YTD), the stock still trades at 13x 2016 EBITDA estimates and sports a 29x price to earnings (P/E) ratio.

Constellation’s stock is up 22 percent in 2015, but it still trades at only a 21.5x P/E based on 2016 earnings projections.

“While the STZ beer valuation is above peers, the company’s beer top-line growth momentum plus potential FY18 benefits from higher margins and cash returns, all support the share price for now,” Zuanic explained.

Susquehanna has a $245 price target for Boston Beer and a $115 price target for Constellation.