The risks to alcohol and food stocks from Ozempic-like weight loss drugs
The rise of new anti-obesity medications could result in less alcohol consumption, impacting Club name Constellation Brands (STZ). The risk already seems to be playing out in food stocks with exposure to snacks and junk food. However, if necessary, the Mexican beer powerhouse behind Corona, Modelo and Pacifico could take action to mitigate any demand pressures. The weight-loss benefits of diabetes drugs such Novo Nordisk 's (NOVO) Ozempic and Club holding Eli Lilly 's (LLY) Mounjaro may turn out to be a headwind to not only alcohol makers — but also soda, snack food and fast-food companies. Novo Nordisk has already gotten U.S. regulatory approval for the active ingredient in Ozempic, semaglutide, to be prescribed to combat obesity. For weight loss, it's marketed under the name Wegovy. The active ingredient in Mounjaro, tirzepatide, is expected to get anti-obesity approval as soon as later this year. STZ YTD mountain STZ year-to-date performance. We don't think Constellation Brands stock will suffer the same fate as shares of leading snack food companies like J.M. Smucker (SJM), Conagra Brands (CAG) and General Mills (GIS), which have all dropped roughly 20% year to date. They have all slid to 52-week lows this month. The decline has come as additional positive trial data has been released on glucagon-like peptide 1 (GLP-1) drugs, which mimic a gut hormone that, when released, can reduce appetite. Ozempic/Wegovy and Mounjaro are GLP-1s. Currently, they are only available as injectables. Initially used to treat type-2 diabetes, the market for GLP-1s has expanded to include weight loss. In June, Eli Lilly and Novo Nordisk released trial data that showed oral GLP-1s were highly effective in reducing patients' body weight — notable because drugmakers believe pills can help expand the market for obesity drugs even if they're slightly less effective than injectable versions. Separate trial data in August from Novo's obesity treatment, Wegovy, found it reduced the risk of heart attacks or strokes by 20%, a finding that analysts say is likely to bolster insurance reimbursement for obesity drugs, which could in turn further adoption. The potential of Mounjaro/tirzepatide for weight loss and other conditions has propelled Lilly stock to record high after record high into mid-September. Jim Cramer has said he expects Mounjaro to be the biggest-selling drug of all time. Correlation does not always equal causation. However, the timing of the release of trial results could have woken up investor fears that obesity drugs pose some kind of risk to certain consumer brands even if the impact is many years away. Key points The increasing popularity of new diabetes/weight loss drugs could curtail consumer appetite for junk food and alcohol. Constellation Brands (STZ), the Club name behind the Mexican beers Corona and Modelo, should be able to weather any such headwind. Product pushes already underway at Constellation to appeal to a more health-conscious consumer are steps in the right. Unlike the snack stocks, Constellation has been holding up, with shares up more than 13% year to date. The stock has benefitted from the Bud Light boycott. But as those market share gains level off, it could be more at risk from the increased usage of obesity treatments. Wall Street thinks that could be a possibility, too. That potential headwind could prompt Constellation to tailor some of its offerings. Morgan Stanley's view Research shows patients on anti-obesity medications (AOMs) "experience significant behavioral changes ... as they reduce their consumption across most food categories ... as well as sugary drinks and alcohol," Morgan Stanley reported in an August examination of how the new weight-loss drugs might impact the food ecosystem. These lifestyle changes resulting from the increased use of AOMs can be seen as an "incremental headwind" in the food and beverage categories as patients reduce calorie intake, the analysts wrote. Morgan Stanley's proprietary AlphaWise Survey of over 300 patients in the U.S. taking AOMs found that alcohol, soft/sugary drinks, and baked products are categories that are most at risk of being cut back on by consumers. The survey also found 61% to 65% of patients said they are consuming less carbonated, sugary drinks and alcohol after they start taking the drugs. The firm calls out Constellation as one of the U.S.-focused beverage companies that "screen highest in our view for exposure to headwinds from increased consumer usage of AOMs." The analysts, however, are not convinced the impact will be a long-term detriment. They said the impact "should be manageable for beverage companies over time," especially since companies have been shifting their portfolio to health-conscious options anyway Constellation has been growing its product pipeline of lower calorie and lower alcoholic drinks like Modelo Oro light beer, Corona Non-Alcoholic and low-calorie wine brands. Morgan Stanley is also bullish on Constellation's "secular drivers," including premiumization, distribution growth and growing demographics, which should be favorable offsets to any AOM risks. Jefferies' view In a separate study, Jefferies surveyed 800 consumers taking GLP-1 weight loss drugs and found changes in beer consumption was "not relevant" for many across different age groups and may not be a significant driver in changing alcohol consumption habits. For patients consuming alcohol while on the drug, the side effects were "not severe," the analysts noted. While a quarter of respondents said they drank less alcohol, almost the same number of respondents drank the same amount — and more than 10% of respondents drank more alcohol, according to Jefferies. A majority of the people in the survey were taking AOMs for less than six months. So, given the short time frame, the Jefferies analysts said it's still unknown to "what extent use of weight loss drugs could drive changing consumer behavior." Based on these factors, the analysts assume there could be a potential 4% hit to alcohol consumption by 2031. Bottom line We're cognizant that GLP-1s could change people's habits and alcohol is potentially high up on the list of what could be consumed less. But for now, it's too difficult to predict exactly how much habits will change and the degree to which such an impact could have on a company like Constellation Brands. We're talking about an impact that may be many years away. It probably won't be until the end of the decade that we see widespread adoption of these drugs. In the more immediate term, Constellation is set to report fiscal 2024 second-quarter results before the opening bell on Oct. 5. Ahead of the print, JPMorgan on Wednesday increased its price target on STZ shares to $307, up from $276, and it views the company as "well positioned" to deliver strong results on strong beer channel trends, increased retail shelf space, and resilient consumer demand. The analysts are forecasting fiscal Q2 earnings-per-share of $3.35, pretty much in line with the Street's consensus estimate. JPMorgan also sees beer sales increasing 10.5%. That would be slightly below the prior quarter's 11% increase in net sales. Still, analysts point to positive sentiment around the stock given the company's strong underlying fundamentals, improved governance, and activist engagement. The firm maintains its overweight (buy) rating on STZ shares. In the event that Constellation is negatively impacted by lower alcohol consumption in the longer run, the Club portfolio is still protected through our diversification into Eli Lilly, which we view as the winner of increased anti-obesity medication adoption. We have yet to see the full benefits of Lilly's obesity and diabetes drug pipeline, which we believe sets the company up for long-term growth. (Jim Cramer's Charitable Trust is long STZ, LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Modelo Especial beer arranged in the Brooklyn Borough of New York, U.S., on Tuesday, Nov. 23, 2021. Gabby Jones | Bloomberg | Getty Images