Consumer stocks Constellation Brands (STZ) and Procter & Gamble (PG) were the subjects of Wall Street scrutiny Thursday. Here are the headlines and our takeaways on each. Procter & Gamble The news: Truist downgraded Club holding Procter & Gamble to a hold rating from a buy and lowered its price target on the stock to $155 per share from $165. Analysts are concerned about the stock’s valuation and the risk to the company’s volumes as P & G raises prices on its products. Analysts believe P & G’s stock has reached its peak valuation with shares rising roughly 10% over the past three months due to investor flight to safety due to the regional banking crisis. If uncertainty over the health of U.S. banks persists, analysts believe, P & G stock will “likely hold up.” But they added, “If the issue dies down, we expect investors to move into less risk-averse stocks.” Truist also thinks “investors may be overreading” the consumer goods giant’s better-than-expected fiscal third quarter in April. These strong results were driven by pricing power, easing input costs and productivity enhancements, all of which compelled management to raise its full-year organic sales growth forecast. But analysts believe investors “overlooked tepid volume trends,” which dropped 3% during fiscal Q3. P & G’s organic volumes “have declined year-over-year for the past four quarters,” the analysts said, arguing a trend like that over the long term is “a sign of demand destruction.” Truist is concerned that softer volumes will continue in the quarters ahead as consumers are faced with elevated inflation. PG YTD mountain Procter & Gamble’s stock performance year-to-date. The Club’s take: We acknowledge Truist’s concerns over Procter & Gamble’s volumes decline, but down 3% last quarter is normal when a company raises prices as much as it did. We think the trade down risk to cheaper alternatives is overblown. But if Procter struggles with volumes in the future, it could have more leeway to reduce prices while protecting margins. That’s because of its declining transportation and raw costs that go into the making of its products like Tide, Pampers and Gillette. Procter is certainly not immune to elevated inflation and weaker economy conditions, but we still believe the stock is a buy on a pullback given the quality of the company. Its long-term growth is driven by innovation in its superior line up of products which offers higher a value proposition to customers — and more importantly, allows the company to raise prices when it needs to. Constellation Brands The news: Wells Fargo called the Club holding a “supernova” between 2009 and 2018 during which the company’s top-line growth catapulted higher and profits in its beer category improved. However, since 2018, analysts point out STZ’s stock momentum has faded. Analysts blamed the company’s money-losing investment in Canadian cannabis firm Canopy Growth , its beleaguered Wine & Spirits business, inflation, and the large payout to the founding Sands family after Constellation exited its dual-class share structure. While beer sales have been holding up in a slower economy, Constellation’s operating margin in the beer category, a growth driver for the company, declined 170 basis points in fiscal year 2023. But analysts said “potential could build” in the second half of the year, citing the company’s pricing power, easing cost pressures, and potentially improving volume growth. Wells Fargo said those drivers could be “competitive advantages” for the beer maker looking ahead. STZ YTD mountain Constellation Brands’ stock performance year-to-date. The Club’s take: Wells Fargo, which rates STZ as one of its “Signature Picks,” highlights important factors that have pained Constellation Brands for the past several years that investors like us should keep top of mind as we think about our stake in the company moving forward. While management had to pay a high sum to get rid of its dual share class structure, bloating the balance sheet in the process, we can sleep better at night knowing the Sands family can no longer pursue value destructing acquisitions. The beer, wine and spirits company has made a name for itself in the premium alcoholic beverage category, especially with its Mexican beer portfolio of Corona, Modelo and Pacifico. In a consumer staple, which will have a tougher time rising prices without pushback, Constellation continues to stand out as one of the few volume growth stories. (Jim Cramer’s Charitable Trust is long PG, STZ. See here for a full list of the stocks.) 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Corona beer, owned by Constellation Brands.
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