Constellation Brands earnings: Where Modelo sales could be most impactful

Constellation Brands (STZ) is set to report earnings this week and with changes in consumer trends, there are questions about how beer brands — such as Constellation's own Modelo and Corona — are rising to the occasion. Wedbush Equity Research Analyst Gerald Pascarelli joins Yahoo Finance Live to break down Constellation's earnings expectations as consumers pivot to new trends.

Non-alcoholic beer consumption has a "very small base," Pascarelli asserts, but anticipates non-alcoholic drinks to be a part of companies' "innovation cycle over the years to come" nonetheless.

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Video Transcript

- You know, we have seen at least anecdotally a rising non-alcoholic kind of movement, if you will, and demand for non-alcoholic beverages. Is that something you're seeing in your research? And what kind of risk does that put the likes of Constellation and its competitors under?

GERALD PASCARELLI: I think there's a trend for-- I think that non-alc fits with the health and wellness trend that we've seen for about a decade now. Whether it's low sugar, low carbs, younger consumers for whatever reason are not drinking as much as older consumers. And so you've seen companies tap into that by offering non-alcoholic options on, you know, in Constellation's case Corona. You've seen competitors do it.

And so non-alcoholic beer is a very small base, you know, to the extent that consumer continues to gravitate towards non-alcoholic beer. I think that you'll just see more non-alcoholic offerings on high-quality brands, you know, just be part of their innovation cycle over the years to come.

- And, Gerald, last question here. You're bullish on this name. But what are the risks, Gerald, to your thesis? What are the risks you think about and that investors should have on their radar?

GERALD PASCARELLI: Sure. Modelo could presumably start to slow. It does not look like there are signs of that. But Constellation is very much a beer-focused company, right? So if their Modelo brand slows, that's going to result in decelerating sales. That's likely problematic for the stock, especially as they're going to be cycling up against very easy compares.

The other thing is if commodities continue to-- if commodities, which are expected to ease, if they show a reversal in trend and remain high or start to increase, you may have another dynamic where the company is going to miss its long-term target on 39% to 40% beer margins longer than expected, which would likely not be well received by the Street.

So that's really it. But again, we monitor this kind of dynamics. We're not really seeing it. We think the company is set up for brighter days ahead.

- Gerald, thanks so much. Cheers. Gerald Pascarelli, analyst at Wedbush. Appreciate it.