Investing.com -- Moody’s Ratings has upgraded the senior unsecured ratings of Constellation Brands (NYSE: STZ ), Inc. from Baa3 to Baa2 and its commercial paper rating from P-3 to P-2. The outlook for the company has also been revised from positive to stable.

The upgrade is due to Moody’s expectation that Constellation Brands’ debt-to-EBITDA leverage will remain at or below 3.25x over the next 12-18 months, even in a slower consumer spending environment. The company has confirmed that its beer imports from Mexico are in line with the United States-Mexico-Canada Agreement (USMCA) and are therefore not subject to the recently imposed tariffs on Mexico.

Constellation Brands is expected to maintain strong margins in the fiscal year ending February 2026. The company also anticipates margin expansion in 2027 due to the benefits of post-wine divestiture restructuring initiatives. These initiatives are projected to cut costs by $200 million. Following the completion of the new Veracruz brewery, capital expenditures are set to decrease in fiscal 2027. This is expected to significantly increase free cash flow, from about $800 million in fiscal 2026 to nearly $1.5 billion in 2027.

The company also plans to use the nearly $900 million proceeds from the sale of its remaining mainstream wine brands to repay some upcoming debt maturities and for share repurchases. This financial flexibility, along with the cash flow, will enable Constellation Brands to manage moderate tariffs related to aluminum and certain wine imports and exports.

In late 2022, Constellation Brands reduced its net leverage target to 3.0x from 3.5x. The company simplified its equity structure by converting family-owned super voting B shares to common A shares, thereby eliminating the Sand’s family controlling ownership. The company also distanced itself from its Canopy investment, reducing credit and event risk. Despite these changes, the company remains exposed to sourcing risks from Mexico, as Mexican beer remains its largest profit contributor.

The Baa2 ratings assigned by Moody’s reflect Constellation Brands’ meaningful scale, better than average growth trends for its premium imported beers, and strong free cash flow. The company’s products include an extensive portfolio of imported Mexican beers and a smaller portfolio of premium wine and spirits. Constellation is the second largest beer company in the United States and the largest imported beer company in the country.

The stable outlook reflects the company’s strong profitability, good liquidity, and Moody’s expectation that Constellation will maintain its net leverage at or below its target of 3.0x net debt-to-EBITDA over the next 12-18 months. An upgrade could occur if the company demonstrates strong operating profit growth, stable to improving financial metrics, and conservative financial policies. A downgrade could occur if the company’s operating performance weakens, liquidity deteriorates, or debt/EBITDA is sustained above 3.25x.

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