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

Market News

Robust US payroll data prompted markets to scale back bets on further Federal Reserve interest rate cuts this year. The December data showed an unexpected gain of 256,000 jobs, far surpassing the forecast of 160,000. The unemployment rate also surprisingly dropped to 4.1% from 4.2%, while wage growth slowed to the expected 0.3%.

Swaps are now pricing in less than 30 basis points of Fed cuts this year. Bloomberg’s gauge of the dollar climbed to a two-year high, while gold rose to $2,686 an ounce. The 10-year Treasury yield rose toward 4.8% – the relentless rise US bond yields is leading a global reset, with consequences for economies and assets everywhere.

US equities suffered a weak end to a poor week on Friday – S&P 500 (-1.5%); Nasdaq (-1.6%). The Russell 2000 (small cap index) slipped into corrective territory, falling 10.3% from its November high. In Asia this morning, equity market also slipped: Nikkei 225 (holiday); Hang Seng (-1.1%); Shanghai Composite (-0.3%). Export growth in China quickened to 10.7% year-on-year in December, beating estimates. The trade surplus soared to a record $992bn as companies rushed to get goods out the door to make up for sluggish demand at home and ahead of Donald Trump’s return to the White House.

The FTSE 100 is currently trading 0.3% lower at 8,228. The pound extended last week’s slump amid concern over the UK’s stretched public finances. Options data point to breach of $1.20, and even deeper losses. Trading volumes are higher than during Truss era and Brexit referendum. Sterling currently trades at $1.2135 and €1.1878

Oil climbed to a four-month high as a fresh wave of American sanctions on Russia threatened to crimp supplies. Citi said that up to 30% of Russia’s so-called shadow fleet of tankers may be affected. Brent Crude rose to $80.60 a barrel. The UK is exploring nuclear power for a new AI data centre plan.

The US Q4 corporate results season kicks off this week, with the expectation for S&P 500 earnings growth of 11.7%, the fastest since Q4 2021.

Source: Bloomberg

Company News

Constellation Brands has released results for the third quarter of its financial year ending 28 February 2025. The company reduced its growth expectations for the full year, warning of subdued spending and value-seeking behaviour among consumers. The US-listed shares were marked down 16% following the update. Other brewing and spirit stocks also suffered losses.

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 30 November 2024, net sales were flat at $2.46bn, below the market expectation of $2.53. Comparable EPS was also unchanged at $3.25, again lagging the market expectation of $3.31.

By division, the beer business grew net sales by 3% to $2,032m, supported by a 1.6% rise in shipment volumes. Depletion growth was 3.2%, largely driven by growth for Modelo Especial of more than 3%, Pacifico of 20%, and the Modelo Chelada brands of 4%. Corona Extra declined by 1%. The beer business continued to outperform the market – in measured sales channels, Constellation outpaced the entire category and was, once again, the number one value share gainer.

The beer operating margin fell by 60 basis points to 42.6%, primarily due to higher marketing spend and increased depreciation expense, partially offset by favourable pricing. Operational efficiency and cost management initiatives continue to enable incremental marketing investments.

In Wine & Spirits, sales fell 14% to $431m, driven by a 16.4% decrease in shipment volumes, mostly driven by ongoing weaker consumer demand and continued retailer inventory destocking across most price segments in the US wholesale market. In contrast, the craft spirits portfolio, which is focused on higher-end brands, delivered depletion growth of 9%. The operating margin fell by 333 basis points 22.1% as the decline in net sales exceeded the decreases in COGS and SG&A expenses. The company continues to advance commercial and operational actions which are expected to drive performance improvements.

The overall business is cash generative, with free cash flow up 13% to $1.6bn during the year to date. Net debt continue to decline, and the company is just below its target of 3.0x net leverage. The group returned $220m to shareholders in share repurchases and increased its quarterly dividend by 11% 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. The company currently anticipates its next modular addition to come online in FY26 and initial production at the Veracruz site to be in late FY26 or early FY27.

Once again, the company lowered its growth forecast for the year to end February 2025. Organic net sales growth is now expected to be 2%-5%, versus previous guidance of 4%-6%. Beer net sales growth is expected to be 4%-7% (versus 6%-8% previously), with operating income growth of 9%-12%. Wine & spirits is expected to fall by 5%-8% (vs. 6%-8% previously), with operating income down 17%-19%. The guidance for comparable EPS has been trimmed to $13.40-$13.80 (vs. 13.60-$13.80 previously), although the target for free cash flow has been lifted $1.6bn-$1.8bn from $1.4bn-$1.5bn.

Source: Bloomberg