Court Ruling Fails to Resolve Aluminum Tariffs, Prolonging Cost Pressure for Constellation Brands

What happened

A recent court ruling has left aluminum tariffs intact, confirming that Constellation Brands continues to face elevated packaging costs for its beer segment, which relies on cans for 41% of its Mexican beer packaging. This comes as the company is already managing three consecutive quarters of beer depletion declines, down 3.0% in Q3 FY26, driven by macroeconomic stress on Hispanic consumers. Despite achieving over $145 million in annualized cost savings and maintaining a 38.0% beer operating margin through pricing, the persistent tariffs threaten to erode margins further if volume trends do not stabilize. Management's heavy capital expenditure in Mexican capacity, around $2 billion from FY26-28, assumes a recovery in demand, but tariffs add uncertainty to the return on these investments. The news reinforces that external headwinds, rather than temporary blips, are shaping the investment landscape, with tariffs becoming a more entrenched obstacle.

Implication

The persistence of tariffs means Constellation's beer margins, currently at 38%, face ongoing compression risk, limiting earnings upside even if volumes stabilize. This increases reliance on the company's cost-savings program, targeting over $200 million by FY28, to offset inflationary pressures and protect free cash flow, guided at $1.3-$1.4 billion for FY26. Valuation multiples, already depressed with a P/E of 23.27x, may stay low until there is clear evidence of tariff pass-through or volume recovery, delaying any rerating toward the base case implied value of $170. The investment case now hinges more critically on external catalysts like the 2026 World Cup and Hispanic employment improvements, which are uncertain and beyond management's control. Consequently, patience is required, but downside risks are elevated if cost savings falter or depletion declines worsen, potentially triggering a reassessment of the 'POTENTIAL BUY' rating.

Thesis delta

The investment thesis does not shift materially but gains added caution, as the tariff issue is now confirmed as persistent rather than transient, reducing the margin of safety. Previously, tariffs were a known risk with potential for resolution; this news suggests they are more durable, increasing the burden on cost-saving initiatives and volume stabilization to drive returns. Investors should lower near-term earnings expectations and closely monitor quarterly margin trends and depletion data for signs of deterioration beyond the bear case scenario.