Constellation Brand's STZ shares climbed 7% last Thursday after a 7.6% EPS beat. The company also just announced its $1.7 billion sale of 30 brands from its wine and spirits portfolio to E. & J. Gallo. These lower-end wines were bringing down top-line growth. Constellation is now focusing on growing it higher-end wines with more room for growth and higher margins.
Constellation's Cannabis Bet
Constellation is making big bets on cannabis. They have been continuously adding to their stake in Canopy Growth CGC , which is the leading player in the Canadian cannabis market. STZ just added another $4 billion investment in August bringing its total stake in Canopy to 38% ownership. The Canadian cannabis industry is quickly expanding, with total sales for 2019 expected to be over $7 billion. Below is a projection of cannabis users and use for Canada in the coming years, data and graph provided by Cannabis Business Plans.
Constellation Brands CEO Bill Newlands told CNBC yesterday that Canopy Growth, being the industry leader for cannabis sales, could generate as much as $1 billion in revenue by the end of this fiscal year. They expect to roll out different types of attractive and delicious edibles as well as infused cannabis beverages, which should expand their customer base. Drinking a calorie-free tasty beverage to get your buzz on opposed to a high-calorie alcoholic drink might be exactly what our health-conscious millennial generation is looking for.
The untapped potential in the cannabis market is exciting for a company like Canopy Growth. The United States is the golden goose that these cannabis companies are waiting for, and it's only a matter of time before we federally open the doors to them. 10 states have fully legalized the consumption of marijuana, 11 have decriminalized it, and 16 states have made it medically legal. Marijuana is now legalized/decriminalized in some way in 70% of the US states. With the first states to legalize cannabis only occurring 7 years ago, the legalization process is escalating quickly and expect to see it federally legal in the coming years.
Constellation Brands saw an unrealized gain of $464.3 million from a change in fair value from Canopy and this fair value growth is only going to continue. Once marijuana is legalized in the US, the value of Canopy/Constellation and other cannabis companies like Aurora Cannabis ACB , Cronos Group CRON, and Tilray TLRY , is going to skyrocket.
STZ is going to be the safest cannabis play because of its $36 billion market cap and diversified portfolio.
Constellation Brands is Fortune 500 international producer of beer, wine, and spirits, best known for their beers Corona and Modelo. They have seen consistent net sales increases in the past 2 years, growing the top-line 16% over the last 24 months. Last years sales growth was somewhat muted because of the 6.5% year-over-year loss in their wine segment. This declining business has been partially sold off to E & J Gallo as I discussed earlier. Constellation's beer portfolio, which makes up over 60% of total revenue, saw revenue expansion of over 10% in 2018 and about 17% growth in 2017.
Constellations portfolio reallocation, with their divestment from lower-end wines and further investment into cannabis, is a very perceptive business strategy that should help Constellation Brands remain a leader in their industry. Understanding that marijuana beverages are going to have a cannibalizing effect on their core business makes their investment in Canopy Growth a good hedge.
Constellation is currently trading at very competitive multiples for a company expanding as fast as STZ is. They are being valued at 20.59x earnings, 15% below the industry average. For a fast growing firm like constellation it is good to look at PE-to-growth (PEG) ratio, to evaluate whether the growth is equitably priced into the valuation. STZ is trading at a 1.96 PEG, much lower than the industry's 3.47 PEG ratio. Even after this surge in price yesterday STZ is still 20% off its all-time high made last year, leading me believe that there is still a lot more runway for this stock to takeoff. STZ - Zacks Rank #3 (Hold).