TD Cowen: 'Sober View Suggests Structural Alcohol Risks Are Overblown'

TD Cowen analyst Seamus Cassidy weighs in on Alcoholic Beverages in the latest Ahead Of The Curve note.

The analyst commented: "Sober View Suggests Structural Alcohol Risks Are Overblown; We believe the market is overstating alcohol's structural bear case. Our analysis of historical consumption patterns, demographic trends, and macro data indicates recent weakness is largely cyclical, reflecting post-pandemic normalization and affordability constraints. With valuations already baking in structural concerns, even modest volume stabilization could support upside for alcohol stocks.

We believe alcohol’s downturn over the past few years primarily reflects a cyclical reset driven by post-COVID normalization and macro pressure on consumers. Our view is supported by alcohol’s stable share of non-durable goods spend, strong correlation with consumer sentiment, and historical recoveries following past demand shocks. This runs counter to the prevailing market narrative that alcohol’s weakness reflects a structural reset, with factors such as moderation, cannabis, and GLP-1 adoption creating sustained category pressure. We believe that alcohol demand will recover when macro pressures subside, but remain cautious in the near term given ongoing economic headwinds. While there are some selfhelp mechanisms that alcohol companies can employ in the meantime (e.g., marketing investments, improved retail execution, innovation), we believe meaningful valuation upside for the group will still depend on a stabilization in alcohol volume trends.

What Is Proprietary? We analyzed decades of alcohol consumption patterns, consumer behavioral shifts, demographic trends, and macroeconomic data across a wide range of sources to support our non-consensus view that recent alcohol declines are primarily cyclical. Our proprietary U.S. alcohol industry model assumes a more positive outlook than consensus, with volumes stabilizing in 2027 if macro pressures ease, challenging the prevailing view of structurally impaired demand.

Financial & Industry Model Implications: We estimate that U.S. alcohol supplier gross revenue will grow at a +1.3% CAGR from 2025– 2030. Our top-down U.S. alcohol industry model conservatively assumes 18+ past year alcohol incidence declines by an average of 33 bps per year and per capita consumption declines at a -1.5% CAGR through 2030. Given positive mix shift to spirits / RTDs and beer pricing power, we forecast +2.5% annual revenue per serving growth to offset declines in participation and per capita consumption.

We are focused on indicators of a cyclical recovery, particularly improvement in consumer sentiment, which has historically shown a strong relationship with alcohol volumes. Near term, sustained pressure on consumer wallets, including from higher gas prices, could delay a recovery. We will also monitor real disposable income trends, easing inflation, and early signs of re-engagement among younger cohorts as key leading indicators of category recovery.

Constellation Brands (STZ, Buy, PT: $174): We see upside to FY27 beer guidance due to easing comps, World Cup tailwinds, and subsiding pressure on Hispanic consumers. We believe the valuation multiple will move higher as the market regains confidence that STZ can return to volume growth despite broader beer category declines. We continue to view STZ's portfolio of Mexican imports as well positioned to outgrow the category via distribution and share gains.

Diageo (DGE / DEO, Buy, PT: 1,750p / $93): Diageo is trading near multi-decade lows as U.S. spirits weakness has pressured results and investors have begun to question the company's ability to return to a durable growth algorithm. New CEO Dave Lewis is known for his transformational leadership style, which we believe will meaningfully reshape priorities, accountability, and the company’s strategic direction. We believe Diageo is positioned for improved results as cost reductions and organizational realignment create capacity to reinvest in top-line growth to improve commercial effectiveness."

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