Beer Stocks React to Mexican Tariff News
Dear Client:
Yesterday evening, several outlets reported comments from president Trump that he plans to levy a 5% tariff on imported goods from Mexico starting June 10. It’s punitive: The New York Times reported Trump’s intent to “gradually increase” the tax “until the flow of undocumented immigrants across the border stopped.” Apparently, unless that is curtailed, CNN added The White House’s intention to increase the tariff increment by 5% each month “until it reaches 25% in October.”
Naturally, some beer stocks fell meaningfully after the news. As of press time, Corona and Modelo importer Constellation’s stock is down around 6%, and Dos Equis/Tecate owner Heineken is down around 2%-3%. ABI, which has Mexican beer Estrella Jalisco, was only marginally down.
So, some significant drops, but not exactly a plummeting. Perhaps because we’ve sort of seen this before. Remember Trump’s border adjustment tax idea? That BAT boogeyman loomed for months over Constellation and its earnings calls, until the provision ultimately did not make it into a bigger tax plan. With this administration, nothing’s a done deal until it’s actually done.
WALL STREET REACTS: RBC THINKS STZ STILL HAS LEVERS TO PULL. Several analysts released notes in the wake of the news. RBC’s beverage team reacted much as they had during the days of the BAT specter, pointing to Constellation’s levers. In a note dubbed “Aqui Vamos de Nuevo (“Here We go Again”),” they maintain their confidence in the company’s prospects.
Specifically: “In the event that the tariff is imposed on Mexican beer” — and who knows? maybe there could be carveouts — “we believe STZ would have several ways of mitigating the impact on EPS: 1) source more of its raw materials/glass buying in the US; and 2) take a price increase without significantly impacting volumes. The strength in the dollar and share repurchases should also help mitigate the impact on EPS (share repurchases are not factored into current FY20 guidance).”
BERNSTEIN WEIGHS POTENTIAL IMPACTS. Meanwhile, Bernstein analyst Trevor Stirling penned a note this morning sharing the potential impacts the proposed tariff could have on the three breweries mentioned above.
ON A-B. Trevor and his team figure the tariff would have a minimal impact on A-B as they only import two Mexican brands — Montejo and Estrella Jalisco – and these two brands’ “contribution to ABI’s US volumes is de minimis.”
HEINEKEN. Heineken, however, could take it on the chin with the proposed tariff, as it “accounts for approx. 7% of global EBIT” and Mexican imports make up nearly half (45%) of their U.S. business, Bernstein estimates.
So assuming that Mexican imports are 2.5% of global EBIT, Bernstein estimates that “a 5% tariff (if fully absorbed), would reduce the profitability of [HUSA] by approx. 17% i.e. approx another 40bps off global EBIT, with every incremental 5% increase in tariffs having a similar impact (if full absorbed).”
AND CONSTELLATION WOULD FEEL GREATEST IMPACT. Then there’s Constellation, which Bernstein believes would feel the “greatest impact” from the potential tariff. As you know, nearly all of Constellation’s beer business is Mexican imports, so Bernstein estimates that the 5% tariff would “reduce imported Mexican beer profits by 7%.”
Why would the percentage reduction in profits for Constellation be less than Heineken? Because Bernstein believes “Constellation generates much higher net margins than Heineken USA.” Still, “the hit to group profits for Constellation is much greater, given the relative importance of the beer business unit to Constellation,” Bernstein concluded.
Until Monday,
Harry, Jenn, and Jordan
“The incompetent with nothing to do can still make a mess of it.”
– Laurence J. Peter
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