Morning Note: Market news and an update from Constellation Brands.

Market News

The oil price rose sharply yesterday – Brent Crude is currently $77.70 a barrel – and is poised for its highest weekly gain since early January 2023, as escalating conflict in the Middle East continued to pose supply risks. Fears intensified after US President Biden avoided directly condemning the potential for Israel to target Iran’s oil facilities. Gold resumes its upward march and trades at $2,660 an ounce.

US equities were little changed last night – S&P 500 (-0.17%); Nasdaq (-0.04%) – with investors looking ahead to today’s employment data. Non-farm payrolls are expected to be up 150k, with an unemployment rate of 4.2% and average hourly earnings up 0.3% month on month. The yield on the 10-year Treasury held steady at 3.84%. The 5-year breakeven yield surged to a 2-month high of 2.13%.

In Asia this morning, markets were firm, with the Hang Seng up 2.1%, bringing its gain on the week to 9%. China remains closed for the holiday, although a gauge of Chinese shares in Hong Kong advanced as traders assessed its recent rally’s sustainability and await details of fiscal stimulus and holiday spending. In another sign of bullishness, China’s 10 largest money market ETFs saw combined outflows of $4.1bn last week, while the 10 biggest equity ETFs lured $6bn in new capital. The Nikkei 225 rose by 0.2% and the yen strengthened against the dollar.

The FTSE 100 is 0.2% lower at 8,261, with the oil majors firm. Sterling trades at $1.3146 and €1.1914. Traders boosted their bearish bets on the pound with risk reversals pointing to a weakening currency after Andrew Bailey suggested the Bank of England may become a “bit more aggressive” in cutting rates if inflation stays subdued.

US dockworkers at East and Gulf coast ports agreed to suspend strikes until 15 January. They started moving cargo again while continuing talks with their employers on a new contract, the union said. Meanwhile, the EU is set to vote on tariffs targeting electric vehicles from China.

Source: Bloomberg

Company News

Constellation Brands has released results for the second quarter of its financial year ending 28 February 2025. Robust demand for its popular beer brands helped soften the hit from a slump in its wine business. The company confirmed its guidance for the full year. The US-listed shares were marked down 4% following the update.

Constellation Brands is a leading international producer and marketer of beer, wine, and spirits, with a portfolio of higher-end brands including Corona, Modelo, and Robert Mondavi. Part of the group’s strategy is to supplement organic growth with bolt-on acquisitions, and to focus on premium, margin accretive, growth opportunities.

During the three months to 31 August 2024, the macroeconomic backdrop continued to weight on demand for beverage alcohol. Net sales grew 3% to $2,919m, a touch above the market expectation.

Comparable EPS grew by 14% to $4.32, beating the market expectation of $4.08.

By division, the beer business grew net sales by 6.0% to $2,530m. Depletion growth was 2.4%, including the impact of one less selling day. The increase was driven by ongoing demand growth for Modelo Especial (+5%), Pacifico (+23%), and the Modelo Chelada brands (2%). Corona Extra declined by 3%. The business continued to outperform the market – in measured sales channels, Constellation outpaced the entire beer category and the high-end segment and was, once again, the number one value share gainer, adding 1.1 market share points.

The beer operating margin rose by 270bps to 42.6%, supported by benefits from ongoing cost saving initiatives, fixed cost absorption driven by volume growth, favourable pricing, and lapping of costs related to the voluntary keg recall last year, partially offset by higher marketing investment. The company has launched disciplined operational efficiency and cost management initiatives to enable incremental marketing investments.

In Wine & Spirits, sales fell 12% to $389m, as the business continues to face challenging market conditions, primarily in the US wholesale channel across most price segments in the wine category. In contrast, the craft spirits portfolio delivered depletion growth of 1.3%. The operating margin was flat at 18.1%, driven by product mix changes and lower volumes, offset by lower other SG&A and higher contractual distributor payments. As announced last month, the company took a $2.25bn write-down for the unit. The company has continued to advance commercial and operational actions which are expected to drive sequential net sales and operating income improvements in the remainder of the financial year.

The overall business is cash generative, with free cash flow up 12% to $1.2bn during the year to date. Net debt continue to decline and the company reached its target of 3.0x net leverage. The group returned $249m to shareholders in share repurchases and increased its quarterly dividend by 13% to $1.01.

The company is expanding its beer business in Mexico and expects to spend $3.0bn between FY25 and FY28 to support the future growth of the core, high-end Mexican beer portfolio with modular additions at existing facilities and a third brewery site at Veracruz.

In September, Constellation lowered its annual net sales growth forecast for the year to end February 2025 to 4%-6% from 6%-7%. Beer net sales growth is expected to be 6%-8%, with wine & spirits down by 6%-8%. The guidance for comparable EPS has been confirmed at $13.60-$13.80, including $449m of shares repurchased through to August 2024. The target for free cash flow is $1.4bn-$1.5bn.

Source: Bloomberg