Fiesta con Berkshire

Wall Street proclaimed booze dead and murdered their stocks. Berkshire Hathaway, not estranged to addictive beverages and benevolent brands, quenched its thirst for value by swooping millions of STZ shares. During Q4 of last year, BRK acquired 5,624,324 shares, then 6,384,676 shares in Q1 of 2025, and 1,319,000 shares the following quarter, accounting for 7.6% of STZ’s outstanding shares worth $2.16 billion.

Not large enough to be Buffett, so the usual suspects, Ted and Todd, are most likely responsible. Berkshire owns 227,750 shares of Guinness owner Diageo (DEO) valued at $25.47 million. Given Ted doesn’t flirt with positions and tends to become the largest shareholder over time, we could deduce the alcohol picks are Todd’s doing. Then again, BRK is STZ’s fourth-largest shareholder. Just seven million odd shares away from dethroning the top slot.

In any case, Constellation Brands seems to have found a home in Berkshire Hathaway’s portfolio. STZ earned a 27.8% return on net tangible equity last year, getting up there with wonderful businesses like Apple, American Express, and Coca-Cola. But unlike the aforementioned, Constellation has just recently hit its stride. In 2012, AB InBev agreed to acquire Grupo Modelo for $20.1 billion. Still, the DOJ filed an antitrust lawsuit a year later, stating it would reduce competition in the US imported beer market. So for the merger to go through, AB InBev was required to divest Grupo Modelo’s entire US business, and Constellation Brands, a partner of Crown Imports, which distributed these beers, was selected as the buyer.

As part of the agreement, STZ received full ownership of Crown, the Nava Brewery in Mexico, and a perpetual U.S brand license for importing, marketing, selling, and innovating with Corona, Modelo, and Pacifico. Grupo Modelo still owns rights outside the US. On June 7th, 2013, STZ closed on the deal for $4.75 billion in cash and $3.4 billion of operating income flows from the beer portfolio today. Such returns call for cracking a cold one or rolling a joint.

Actually, no, because the reefer days flamed out years ago, but unfortunately, the resin still stinks. STZ’s first puff of the devil’s lettuce occurred in 2017 when former CEO Rob Sands acquired 18.9 million shares and 18.9 million warrants of Canopy Growth, costing $191 million. The buzz wore off quickly, however, and Sands invested another $3.8 billion in 2019, which grinded to dust over the next several years.

Thankfully, Sands’ successor, Bill Newlands, has pulled the plug on cannabis. As well, he’s cutting wine and spirits brands, choosing to focus on the renumerative beer family: Modelo, Corona, and Pacifico, or what Todd Combs would call “golden gooses”:

“One is, every business has a golden goose. Doesn't mean it's one golden goose. Sometimes you have multiple golden gooses. But I think an error that people make is that not... God knows I've made this myself, is you look at the whole thing versus really getting down, again, into the constituent parts, into the details, and saying, Oh, well this makes that work. And because this makes that work, this then makes everything else work. So it's... there's a domino effect or a compounding effect or whatever.”

Just how golden are STZ’s geese? Since 2013 to present, beer volumes, revenues, and operating income have increased at 9.63%, 10.28%, and 16.86% clips, respectively. STZ now dominates the US market and has grabbed share every year from peers like TAP and SAM. Gross margins have also consistently been in the mid to low fifties, while the global industry average has measured around 42%. STZ’s operating margins are in the low thirties as well, which trample TAP’s 12%.

Such enviable numbers stem from the fact that about half of STZ’s beer sales are from loyal customers. Modelo, Corona, and Pacifico are embedded in Hispanic culture. Paying up for the buzz is a no-brainer to them. Although recent immigration policy has hurt STZ, they lowered guidance on Tuesday, forecasting organic net sales to fall as much as 6% compared to a prior 2% drop. Bill Newlands at this week’s Barclays Global Consumer Staples Conference:

“Over the last several months, high-end beer buy rates decelerated sequentially, as both trip frequency and spend per trip declined… Notably, high-end beer buy rate declines for Hispanic consumers were more pronounced than general market declines, which has an outsized impact on our beer business compared to the broader beer category."

The stock gapped down about seven percent, breaking to new lows after Newland’s words. Another unwarranted move from the street. I understand ICE as a real, temporal threat. Hispanics will not hide forever. At some point, a Democrat will take the presidency, and ICE will shutter. Just think what happens if Newsome, or even AOC, wins the 2028 election. I envision Modelo-fueled parades in the streets of Los Angeles.

Political speculations aren’t really germane though. At the end of the day, sixty-six million Hispanics call the United States home. I've a feeling that number will go up as decades pass, regardless of who’s in the White House. Take a gander at this trend (% of US population):

1970: 9.1 million (4.4%)

1980: 14.1 million (6.4%)

1990: 22.4 million (9.0%)

2000: 35.3 million (12.5%)

2010: 50.5 million (16.3%)

2020: 62.1 million (18.9%)

2023: 65.2 million (19.5%)

No doubt this Hispanic wave into the US was huge for STZ. But more was needed for Modelo to ruin Bud Light’s twenty-two-year streak as the number one beer. In 2015, for the very first time, STZ advertised to non-Hispanics. Careful not to abandon their core customer, the marketing team always trial runs English-speaking commercials to a Hispanic audience. Ads must resonate with both groups to get airtime.

“The worst thing we can do is something that would cause our core Hispanic customers to say ‘that’s not my Modelo’” was a statement from STZ’s Greg Gallagher (SVP of Brand Marketing) in a WSJ article from 2023. But don’t think this Murphy's law mentality has STZ on its heels. Marketing spend has been around eight to ten percent of sales, and they’ve conducted a Pavlovian bombardment of positive associations: fun parties, working hard, relaxing at the beach, cheering on your favorite team, spending time with family, etc.

Modelo’s “Fighting Spirit” campaign and UFC partnership were a real knockout shot. There’s an emotive tug when you slam a Modelo, your favorite fighter hits his or her opponent with a flying knee to the head, and the crowd goes nuts. “Brewed for those with fighting spirit” means something to you. Modelo, however, did not renew its contract with the UFC. Bud Light snagged the spot in an effort to bury the Dylan Mulvaney saga. Maybe a day late and a dollar short, BUD?

Anyway, it’s fine. Modelo has swiftly pivoted to other events like college football, where boozily fans cheer on a still-violent contest. And while you definitely won’t see Modelo on the PGA tour, the brand does have a softer side. Modelo believes the true mark of a fighter is helping your mother around the house.

Corona and Pacifico are Constellation’s more laid-back brews with slogans “Find your beach” and “Find your way.” They’re ubiquitous in SoCal and entrenched along the coastline. Surfers love them. As of late, the Corona “Sunbrew” is the craze. Sunbrew is the number one new SKU in beer and the sixth-ranked share gainer overall. It’s regular Corona beer blended with real orange, lime peels, and a splash of citrus juice. Mmmmm. I’m sure STZ has more of these coming down the pipe too.

Speaking of what’s to come, Pacifico is still in the early innings. It’s the number two brand in Los Angeles, but half of the beer’s growth now comes from outside California. Newlands has praised the beer’s trajectory, and on July’s earnings call said, "We expect to put some fuel on the fire, if you will, around that brand,” which means STZ will have Reyes Beverage Group get Pacifico on the hottest shelves.

Reyes is the nation's largest beer distributor, handling about a tenth of the market and responsible for a quarter of STZ’s sales. Advantaged distribution adds some nice depth to STZ’s moat and helped them gain market share in forty-nine states this fiscal year.

Also, STZ’s cup runneth over with cash flows. Free cash flow last year was $1.9 billion, dividends were $732 million, and they repurchased $1.1 billion of stock. Debt was reduced by $392 million as well and they raised $409 million from divestitures (wine, spirits, craft beer). STZ bought back another $600 million of stock during this year’s first half too. Going forward, management will keep an investment-grade balance sheet and reward shareholders via buybacks and dividends despite headwinds. Hooray.

The stars are aligning for Constellation Brands. They’ve a great business with century-old brands and solid management. Berkshire also loves the stock. So take a swig? I’m not sure yet. If we peg normalized free cash flow at $2 billion, STZ trades at a 7.7% yield. That’s a reasonable price for what looks like a GDP plus grower, but I’d prefer a larger margin of safety. Shares have been whacked this week and are down 33.71% year to date. Hopefully the damage continues. I’m waiting until STZ taps 140.