Constellation Brands: A High-Quality Business Facing Temporary Problems, or Something Worse?

Constellation Brands (NYSE: STZ) has spent more than a decade building one of the best growth stories in the alcoholic beverage industry. The company owns the #1 beer brand in the U.S., with Modelo Especial and a top-five brand, Corona Extra. That success has translated into 15 straight years of volume growth and industry-leading operating margins.

But fiscal 2026 has been rough. The stock is down 40% year to date as the company battles aluminum tariffs, a pullback among Hispanic consumers who represent half its customer base, and the first volume declines in over a decade. In its most recent quarter, revenue dropped 15% year over year to $2.5 billion , and management slashed full-year guidance in September .

Yet look past the near-term pain, and we might have a high-quality business selling at an attractive price. Constellation still maintains best-in-class operating margins around 40% in its beer segment, and even with the drag from its small wine and spirits business, consolidated operating margins of 34% remain well ahead of Anheuser-Busch InBev's (NYSE: BUD) 26% and Molson Coors' (NYSE: TAP) 15%. Meanwhile, its core brands continue to hold their dominant position as the company gains market share, even as volumes decline.

Management insists the recent headwinds are cyclical, not structural. For investors, the question is whether this is a cyclical setback in an otherwise strong business, or the start of a real decline?

Reasons for optimism

First, these brands aren't losing their grip on consumers. Management reported increased loyalty for both Modelo and Corona. Modelo holds a commanding 10% of the U.S. beer market, two full share points ahead of its nearest competitor. In addition, management pointed to its share of Gen Z consumers, twice the industry average, as evidence it isn't losing relevance but rather navigating temporary headwinds.

Image source: Investor relations

Second, with beer sales representing over 80% of total sales, those margins matter. Even after taking hits from tariffs and volume declines, last month Constellation reported 40.6% operating margins in beer for the second quarter. This level of profitability means the company can weather storms while still investing in marketing and brand support. In addition, its industry-leading profitability has enabled it to generate free cash flow margins averaging 17.5% over the past three years.

Third, the Hispanic consumer story is likely to improve after a rough start to the fiscal year. Hispanic consumers represent roughly half of beer sales, and demand has been volatile due to the Trump administration's immigration policy. Last month, on the Q2 '26 call, CEO Bill Newlands noted unprecedented volatility due to concerns about job losses and immigration enforcement. Newlands believes they may have "hit the bottom here" though, and once things stabilize, sales should recover.

Finally, the company generates strong cash flow. In fiscal 2025, Constellation earned nearly $2 billion in FCF , giving it plenty of flexibility if the downturn persists. With $10.5 billion in net debt as of Q2 and leverage sitting comfortably within its 3.0x target, and well below the 4.0x covenant, the balance sheet isn't an issue for now. If needed, the company could pause its $1 billion annual share buyback program and redirect that cash toward paying down debt.

Some risks worth watching

What could go wrong? The biggest concern is Americans are drinking less beer. According to Gallup's 2025 Consumption Habits survey, only 54% of U.S. adults now drink alcohol -- the lowest in nearly 90 years of tracking. Beer preference has fallen to just 34% of consumers, down from 41% historically. What's more, young adults are leading the decline with more of a negative view of alcohol compared to their parents' generation. That's a problem because even the best brands struggle when the overall category is in decline.

In addition, the Hispanic consumer recovery remains uncertain. Management believes they've "hit the bottom" on the weakness affecting roughly half their beer sales, but there's no guarantee conditions improve as quickly as hoped. If immigration enforcement concerns persist or the job market softness continues, the volume headwinds could last longer than the market expects.

Finally, cost pressures are building. The company is investing heavily in Mexican brewery capacity while simultaneously getting hit with aluminum tariffs. It's challenging to reduce costs when expanding capacity and incurring higher tariffs simultaneously. If volumes stay weak or tariffs increase further, there's only so much cost-cutting that can be done to offset the pressure.

The Foolish bottom line

Constellation Brands owns some of the most valuable beer brands in America. Modelo and Corona command premium prices, generate industry-leading margins, and have consistently gained market share for years. That kind of brand strength is rare and valuable.

Yet the stock trades at just 12 times free cash flow and pays a 3% dividend yield , well below its typical valuation range. If Hispanic consumer trends stabilize, there's meaningful upside from today's depressed levels. The question is whether to buy now or wait to see how things unfold in the coming months.

Bryan White has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.