Constellation Brands Shows Us the True Price of Pot

As spring spreads over the land, many yoga teachers put students through a long series of twists, aiming to straighten backs against the coming season’s rigors. That’s what Constellation Brands (NYSE:STZ) has been going through since buying what could become a majority stake in Canopy Growth (NYSE:CGC), a Canadian marijuana company, last summer.

Constellation Brands Shows Us the True Price of Pot

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Expect more contortions April 4, when Constellation Brands reports earnings. The company is expected to report $1.72 per share of earnings, with $1.77 hoped for, on revenue of $1.73 billion.

The $4 billion purchase of Canopy hiked Constellation’s debt (total liabilities) to $12.5 billion against a market capitalization of $33.5 billion. My question remains the same: When will dividends from that investment begin to flow?

The answer is … not yet. Since the deal was announced, STZ stock has been floating steadily downward and is now roughly 20% below where it was in August.

Still Not Legal

While Constellation stock has been moribund, CGC stock has taken off like a rocket ship, opening for trade April 2 at about $42.50 per share from the $26 level it was at before Constellation deal. That’s a market cap of nearly $14.6 billion for a company that was on pace for just shy of $250 million in revenue in fiscal 2019, based on its analysts’ consensus. That’s mainly coming from Canada, where legal marijuana was authorized last year.

Constellation, meanwhile, is on pace for about $8.1 billion in revenue for its 2019 fiscal year, after dropping its earnings estimate for the year by 25 cents per share in January (due to its investment in CGC stock). STZ has a market cap of about $33.6 billion.

In the U.S. marijuana is available either medicinally or recreationally in 33 states, but despite their fancy suits, lobbyists still have an uphill fight to win full legalization. New York recently refused to legalize pot despite lobbying by its Governor. New Jersey cancelled its legalization vote. Connecticut legislators have yet to make a decision, and bills have been advancing in New Mexico, but the New Mexico bill would cut private companies out of the retail trade. The issue’s momentum is being blunted.

Even Colorado, which has had legal pot for years, can’t give dealers legal access to the banking system, as that’s an issue for the U.S. Congress. Editors in Colorado are also beginning to emphasize pot’s side effects, like an increase in emergency room visits. 

Wine Left at the Altar

With its balance sheet in a shambles and legal weed still out of reach. Constellation has taken to selling off some of the family silver, with plans to sell up to 40% of the wine and spirits portfolio in a bid to hike margins. The brands in question represent about $340 million in earnings, out of about $2.3 billion reported last year.

A deal with E.J. Gallo is in the works, but at $2 billion, not the $3 billion the company hoped to get a few months ago. Constellation is blaming all this on millennials being unable to find careers, on the one hand, and unwilling to buy cheap wine on the other hand.

Constellation has been trying to unload its cheaper wine brands ever since agreeing to buy into Canopy, but it’s a strategy that will take time to play out.

The company may only get half as much from the low-cost wines that birthed it than was spent on the high-end pot it still can’t sell. But most analysts following the stock seem willing to wait for it, with 19 of 27 having it on their buy lists.

I’d prefer to buy reality than hope, especially in a frothy market.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.


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