A Multimillennial Trend and a Generational Buying Opportunity

By Nick Ward, Analyst, Wide Moat Research

When's the last time you had a martini?

A margarita? A Manhattan? A mojito? A Moscow mule?

What about a Modelo Especial or a Michelob Ultra?

If you're the average, younger American, the answer is probably "not recently."

New surveys are showing that Americans in general are stepping back from booze. And younger Americans – Gen Z – in particular are embracing a more sober lifestyle. The chart below gives you some idea.

Numbers like these are putting a long-held investing truism in doubt – the idea that alcoholic beverage companies will generally increase sales and earnings through good times and bad.

After all, even during economic recessions, Americans have historically loved to drink. And not even a constitutional amendment could stop that habit.

But maybe that's changing...

Peak Alcohol?

According to a 2024 Gallup poll, more and more Americans are attributing alcohol consumption to poor health.

The study claimed, "Currently, almost nine in 10 U.S. adults say alcohol use is 'very' (33%) or 'somewhat' (53%) harmful to those who drink it."

Both of those figures are up three percentage points over the past year.

Because of this, most Americans say that they are going to reduce alcohol consumption.

As mentioned, this is especially the case amongst the younger adults polled. 65% of adults aged 18 to 35 said that having one to two drinks a day was bad for their health (compared with just 37% of people aged 35 to 54 and 39% of people aged 55 and older). This poll points toward a potential demand issue for alcohol companies moving forward.

And there's another problem spirits companies are facing...

Trade War Woes

Many spirits companies have been caught up in Trump's trade wars.

Brown-Forman (BF.B) is a spirits producer that is synonymous with Kentucky bourbon. And that spirit has been a tariff target in other countries looking to penalize American imports. The company's brands, such as Jack Daniel's and Woodford Reserve, are facing anti-American backlash as foreign consumers boycott American goods.

Then there's Constellation Brands (STZ). The company holds the exclusive American distribution rights for cervezas like Corona, Modelo, and Pacifico. This Mexican beer portfolio is the largest driver of sales for Constellation.

But, unfortunately for Constellation, those Mexican beers are brewed... in Mexico, a country that's been a (surprising, in my opinion) target of the Trump administration's tariffs.

These artificial headwinds are hurting sales and margins.

Brown-Forman recently lowered its full-year sales guidance into negative territory for the current fiscal year. Analysts are calling for negative 10% earnings-per-share ("EPS") growth for this company over the next year.

Constellation is in a similar position. This company has restructured its portfolio recently, selling off its wine assets... doubling down on Mexican beer. If it wasn't for tariffs, investors might have loved that idea.

STZ's beer portfolio generates operation margins of nearly 40% and has grown consistently for decades. This company has posted positive annual EPS growth during 18 out of the past 20 years. Yet, analysts are calling for negative 8% EPS growth this year, which is hurting the stock's sentiment.

That's bad news for current shareholders. But for those looking to establish a position in the spirits industry, it does present an interesting opportunity...

Valuation Always Wins

After trading down from $50 to $25, Brown-Forman shares sport a price-to-earnings (P/E) ratio of 14.3 times. During the past 20 years, BF.B's average P/E ratio is 26.7 times.

Constellation Brands has seen its share price fall by more than $100/per share from $270 to $160, resulting in a P/E ratio of just 12.1 times... well below its 20-year average of 18.2 times.

With that in mind, relative to historical averages, Brown-Forman's margin of safety is 46% and Constellation's is 33.5%.

Even if alcohol consumption headwinds here prove to be secular, I think both discounts are far too low.

Oh, and despite dour forecasts for the current year, both Brown-Forman and Constellation are expected to return to growth in the years ahead. Brown-Forman is expected to return to mid-single-digit growth in 2026 and 2027. Constellation's bottom-line growth is expected to rebound in 2026 and 2027, with consensus estimates calling for growth of 9% next year and 4% the year after that.

I don't know when the sentiment surrounding these stocks is going to change. But I know this: Shares of these stocks haven't been this cheap since the fallout from the Great Recession .

Now looks like a great opportunity to – as Buffett says – buy while others are fearful.

The phrase "generational buying opportunity" is overused.

It's hackneyed. It's hyperbolic.

But, looking at the fundamentals at the bargain-bin valuations, I don't know how else to describe the setup with these spirits companies.

Perhaps that's why Warren Buffett's Berkshire Hathaway has been aggressively building a multibillion-dollar stake in Constellation Brands in recent quarters. I wouldn't be surprised if Berkshire makes a move to acquire Constellation at some point.

Like it or not, humans have been consuming alcohol for literally thousands of years.

The earliest evidence of man-made alcohol consumption comes from a burial site in Raqefet Cave in Haifa, Israel. Researchers from Stanford University found residue of from stone mortars that pointed toward beer-making.

There's evidence of a mead/sake hybrid (fermented rice, honey, and fruit) being produced in China dating back at least 9,000 years.

History Channel notes that the earliest evidence of wine (fermented grapes) comes from archeological sites near Tbilisi, Georgia that dates back to 5,980 B.C.

Put simply: Alcohol consumption is a multimillennial trend. And these quality spirits companies are just about as cheap as I've ever seen them.

It's easy to buy great companies when they're riding a wave of enthusiasm. It's much harder to pull the trigger when there's negative sentiment around their industries.

As we like to say, quality always wins out.

And in the spirits industry, it doesn't get more high-quality than Brown-Forman and Constellation.

Cheers,

Nick Ward
Analyst, Wide Moat Research