Sell Constellation Brands, $STZ Faces Valuation Challenges Amid Divestitures and Consumer Headwinds

Constellation Brands reports Q1 FY2026 results, projecting a cautious outlook with lower free cash flow, leading to an overvalued stock at current price.

ROCHESTER, N.Y., July 1, 2025 – Constellation Brands, Inc. (NYSE: STZ), a leading international producer and marketer of beer, wine, and spirits, released its first quarter fiscal year 2026 financial results on July 1, 2025, revealing a complex landscape shaped by strategic divestitures and macroeconomic challenges. The company, known for iconic brands like Corona Extra, Modelo Especial, The Prisoner Wine Company, and Casa Noble Tequila, is navigating consumer demand headwinds driven by the current socioeconomic environment. Despite strong brand health in its beer portfolio and a disciplined capital allocation strategy, the company’s updated financial metrics and forward-looking guidance suggest a cautious approach, impacting its valuation. An analysis using the Buffett and McGrew Valuation Methods indicates that STZ is currently overvalued at its closing price of $166.42, with an intrinsic value of $89.73 per share. This article delves into the company’s recent performance, financial metrics, management’s outlook, and valuation implications.

Strategic Shifts and Operational Performance

Constellation Brands continues to execute its strategic objectives, focusing on its high-end beer and wine portfolios while streamlining its operations through divestitures. The beer business, anchored by Corona Extra and Modelo Especial, delivered leading share gains in U.S. tracked channels, supported by incremental marketing investments that bolstered brand health. Meanwhile, the wine and spirits segment underwent significant restructuring following the divestiture of the SVEDKA brand and other wine assets, completed in June 2025. These divestitures, aimed at focusing on higher-growth, higher-margin brands, resulted in a projected organic net sales decline of 17-20% for the wine and spirits segment in fiscal 2026. The company also returned over $300 million to shareholders through share repurchases, reflecting its commitment to balanced capital allocation.The Q1 FY2026 earnings release highlights the impact of these divestitures, with $98 million in net sales and $55 million in gross profit less marketing excluded from March 1, 2024, to January 5, 2025, due to the SVEDKA divestiture, and an additional $113 million in net sales and $110 million in gross profit less marketing excluded from June 2, 2024, to February 28, 2025, due to the 2025 wine divestitures. These adjustments have significantly altered the company’s financial profile, contributing to a lower free cash flow (FCF) outlook for the fiscal year.

Financial Metrics: ROE and ROTA

To assess Constellation Brands’ financial health, we calculate the trailing 12-month (TTM) Return on Equity (ROE) and Return on Tangible Assets (ROTA) using the latest available data.

• Return on Equity (ROE): ROE is calculated as Net Income divided by Shareholders’ Equity. Based on the fiscal 2026 earnings guidance and prior financials, we estimate TTM Net Income using the comparable earnings per share (EPS) guidance midpoint of $12.75 and approximately 175 million diluted shares outstanding, yielding an estimated Net Income of $2,231,250,000. Shareholders’ Equity, as of February 28, 2025, was $8,437,400,000. Thus, ROE = $2,231,250,000 / $8,437,400,000 = 26.44%. This robust ROE reflects strong profitability relative to equity, though it is tempered by potential non-recurring charges from divestitures.
• Return on Tangible Assets (ROTA): ROTA is calculated as Net Income divided by (Total Assets – Intangible Assets). Total Assets as of February 28, 2025, were $25,058,300,000, with Intangible Assets (Goodwill of $2,770,500,000 plus Other Intangible Assets of $2,728,400,000) totaling $5,498,900,000. Tangible Assets = $25,058,300,000 – $5,498,900,000 = $19,559,400,000. Using the estimated TTM Net Income of $2,231,250,000, ROTA = $2,231,250,000 / $19,559,400,000 = 11.41%. This indicates efficient use of tangible assets, though the figure is influenced by the same divestiture-related adjustments.

These metrics highlight Constellation Brands’ ability to generate returns, but the negative TTM Net Income of -$31,100,000 reported for February 28, 2025, suggests potential volatility due to non-recurring items, such as divestiture losses or impairment charges.

Management’s Fiscal 2026 Outlook

Management’s guidance for fiscal 2026, ending February 28, 2026, reflects a cautious stance amid consumer demand challenges and the impact of divestitures. Key projections include:

• EPS: Reported EPS of $12.07 – $12.37 and comparable EPS of $12.60 – $12.90.
• Enterprise Organic Net Sales: Expected to decline by 2% to grow by 1%, with beer net sales growth of 0-3% and wine and spirits organic net sales declining 17-20%.
• Enterprise Operating Income: Reported growth of 70-74%, but comparable operating income declining 1-3%. Beer operating income is projected to grow 0-2%, while wine and spirits face a 97-100% organic operating income decline.
• Corporate Expense: Approximately $65 million.
• Interest Expense (Net): Approximately $88 million.
• Tax Rate: Approximately 19% for both reported and comparable measures.
• Weighted Average Diluted Shares Outstanding: Approximately 175 million, inclusive of share repurchases.
• Operating Cash Flow: $2.7 – $2.8 billion.
• Capital Expenditures: Approximately $1 billion, with $1 billion targeted for Mexico beer operations.
• Free Cash Flow: $1.5 – $1.6 billion.

This outlook underscores the challenges in the wine and spirits segment, offset by modest growth in the beer business, and reflects management’s focus on operational efficiency and strategic realignment.

Valuation Analysis

Using the Buffett and McGrew Valuation Methods, we assess STZ’s intrinsic value based on updated financial data. Constellation Brands is classified as a non-growth stock due to its historical 5-year FCF compound annual growth rate (CAGR) of 6.8%, which is below the 10% threshold. The analysis uses a TTM FCF of $1,550,000,000 (midpoint of FY2026 guidance), Net Debt of $12,045,400,000, and 178,220,194 shares outstanding as of February 28, 2025.

• Buffett Valuation Method: This method projects FCF for 10 years at a 3% growth rate, calculates a terminal value using a 2.5% perpetual growth rate, and discounts cash flows at an 8% rate (4% Treasury + 4% premium). The enterprise value is $28,039,586,468, and after subtracting Net Debt, the equity value is $15,994,186,468. Dividing by shares outstanding yields an intrinsic value of $89.73 per share. Applying a 25% margin of safety gives a target price of $67.30.
• McGrew Valuation Method: For non-growth stocks, this method uses identical assumptions, resulting in the same intrinsic value of $89.73 and target price of $67.30.

Comparing the intrinsic value to the closing price of $166.42, the stock is 85.49% above its intrinsic value, classifying it as overvalued (above the 36% threshold for overvaluation).Valuation Table

Note on Valuation Calculation: The intrinsic value was calculated using the Buffett and McGrew Valuation Methods, which project TTM FCF ($1.55 billion, based on FY2026 guidance midpoint) over 10 years at a 3% growth rate, with a 2.5% perpetual growth rate for the terminal value, discounted at 8%. Net Debt ($12,045,400,000) was subtracted from the enterprise value, and the result was divided by 178,220,194 shares outstanding. A 25% margin of safety was applied to determine the target price. The analysis relied on data from the Q1 FY2026 earnings release and prior financial statements, with TTM FCF estimated from guidance due to the lack of specific Q1 TTM data.

Implications for Investors

The overvaluation of STZ at $166.42 suggests caution for potential investors. The significant reduction in intrinsic value from the previous estimate ($126.59, based on $1.938 billion FCF) reflects the lower FCF guidance, driven by divestitures and weaker consumer demand. While the beer segment remains a bright spot, the steep decline in wine and spirits operating income poses risks. The robust ROE (26.44%) and ROTA (11.41%) indicate operational efficiency, but potential non-recurring charges and macroeconomic pressures warrant close monitoring.Constellation Brands’ focus on high-end brands and disciplined capital allocation, including $300 million in share repurchases and a quarterly dividend of $1.02 per share (payable August 14, 2025), demonstrates confidence in long-term value creation. However, the near-term outlook suggests challenges, particularly in the wine and spirits segment. Investors may want to wait for a price closer to the $67.30 target before considering entry, aligning with the model’s conservative valuation approach.

Conclusion

Constellation Brands is at a pivotal moment, balancing strategic divestitures with efforts to strengthen its core beer and premium wine portfolios. While management’s guidance reflects resilience in the face of consumer headwinds, the lower FCF outlook and overvalued stock price signal potential risks. The company’s commitment to sustainability, community investment, and responsible consumption, as highlighted in its 2025 ESG Impact Report, underscores its long-term vision. However, investors should approach STZ with caution until its valuation aligns more closely with its intrinsic value.

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