STZ - Constellation Brands may have to rethink production options in Mexico due to drought

Evercore ISI weighed in on Constellation Brands ( NYSE: STZ ) after the stock fell almost 4% on Monday after comments from President Obrador of Mexico discussing the future of beer production in Northern Mexico. Obrador made it clear is that the Mexican government will no longer be granting new permits for beer production in the region.

Analyst Robert Ottenstein said while Obrador comments regarding the water shortage do not mean that he is in favor of forcing STZ to shut its breweries in the north, the odds of STZ being asked to reduce production and/or rethink certain expansions may have increased due to the prolonged and severe drought in the region.

Ottenstein and team feel that if there are constraints on STZ’s production in the north part of Mexico some of the options in place include more aggressive pricing actions in the U.S. to slow demand, some sort of joint production agreement with BUD or Heineken, shifting expansion plans from Nava/Obregon to Veracruz in the southern part of Mexico, and exploring production opportunities outside of Mexico to the extent the firm’s agreement with BUD allows.

Evercore has an Outperform rating on STZ and price target of $285.

Shares of STZ fell 0.37% premarket to $234.00 and trade at their lowest level of the last six weeks.

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