US-based Constellation Brands (Constellation Brands Stock Quote, Chart NYSE:STZ) made the investment deal heard ‘round the cannabis world this summer when it upped its stake in sector-leading Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart: TSX:WEED, NYSE:CGC), a move which triggered a month-long run-up in US and Canadian pot stocks.
But don’t expect the $4 billion stake in Canopy to factor into STZ’s valuation anytime soon, says Gordon Reid of Goodreid Investment Counsel, who points out that recreational cannabis is still in its infancy.
Shares of Constellation Brands are up in midday trading on Thursday as investors react to the company’s strong quarterly earnings report. The beer and alcohol maker recorded revenue of $2.25 billion during its fiscal second quarter ended August 31, 2018, while posting a consensus beat on EPS at $2.87 per share versus the Street’s $2.59. (All figures in US dollars.)
That’s welcome news to a company whose fortunes turned earlier this year. After a good half-decade of steady growth, the stock has had an up and down 2018, hitting an all-time high of $236.62 on April 30 before dropping down to the low $200s by August. A slowdown in earnings growth had been the culprit, but beer sales were up over fiscal Q2, boosting operating margins in that division by ten basis points.
Speaking of the company’s direction going forward, CEO Rob Sands emphasized the potential role that Canopy Growth and cannabis might be playing.
“The double digit EPS growth we delivered in the second quarter is top-tier for consumer product companies,” said Sands in a press release . “Constellation remains the high-end leader and the most significant growth contributor in the U.S. beer market, and we’re seeing strong growth trends for the super-premium plus segment of our wine portfolio.”
“Our $4 billion investment in Canopy Growth provides us with a strong foothold in the emerging global cannabis market, which could be one of the most significant growth opportunities of the next decade,” said Sands.
All the same, investors shouldn’t pin Constellation’s fortunes on cannabis, says Reid, president and CEO at Goodreid Investment, who spoke to BNN Bloomberg about the Canopy Growth investment.
“I think it’s more of a concept issue,” he says. “They’re hedging their portfolio, which is made up of spirits and beer and wine. I think it’s a smart move for the investment dollars in the context of what Constellation represents. It’s a pretty cheap hedge.”
“But as an investor, you really don’t want to make a big leap to thinking that this is the next engine for Constellation,” he says. “I think you have to look at Constellation on the basis of what they do now and what they do now is in some trouble.”
“Even though these [cannabis] companies are trading at ridiculous valuations, it hasn’t even gotten off the ground,” he says. “I wouldn’t analyze the company with that component as a piece of your thesis, and given that, I’d probably not invest in Constellation.”