Constellation Brands (NYSE:STZ) has traded a lot like a tech stock over the last year.
It fell hard last fall, found its footing in January, and opens for trade Aug. 29 up 25% on the year, at $202 per share.
Constellation stock is succeeding despite having $4 billion tied up in Canopy Growth (NYSE:CGC), a money-losing marijuana company on which it took a $54 million earnings hit last quarter.
Canopy itself is down 11% on the year and has dropped off a cliff, down from over $200 in May to under $50 in August. It’s no longer a large-cap stock as the market cap is down to $8.4 billion.
Critics might ask what Constellation bulls are smoking. I went to find out.
STZ Stock and Pot 2.0
Constellation started life selling low-margin New York state wines. Everything it has been doing over the last several years across the company is aimed at higher margins. This includes its Canopy investment.
Canopy is losing money, according to Constellation bulls, because it is investing ahead of legal demand. Dan Loeb’s Third Point hedge fund has lost patience, dropping Canopy Growth stock as it began to fall during the second quarter.
It is taking more time than expected to get legal sales rolling in Canada, the bulls admit. It will take more time than anticipated to get legal weed in the U.S., but that’s coming too, they say. CGC will be ready.
That won’t be your grandpa’s pot market, either. The budding Canadian opportunity will include vaping, edibles, and infused beverages, products that take more processing and thus have higher margins than simple leaf. They’re calling it Canada 2.0.
Break out the Booze
Constellation is also looking for high margins in its alcohol businesses.
Tie-ins with fighting and soccer are making Modelo a high-end brand in the beer market.
Constellation is getting out of cheap wine, taking $1.7 billion from E.J. Gallo for brands selling at under $11 per bottle. It previously unloaded its Canadian wine business. What’s left are premium brands like Robert Mondavi, 7 Moons, and Ruffino.
Something similar is happening in the spirits business. Brands you may remember from college, like Black Velvet whiskey, are out. Instead Constellation is buying interests in new, small, upcoming brands like Durham Distillery in North Carolina. It’s like a big brewer getting into microbrews.
Constellation is betting that people who do drink will pay more to drink better. Constellation spirits sales, including brands like Svedka vodka and Casa Noble tequila, were up almost 8% in July.
CEO Bill Newlands calls what Constellation is doing a “premiumisation strategy.” Newly bullish analysts say the strategy makes Constellation a stock you can retire on.
It doesn’t hurt that STZ has been beating earnings estimates consistently this year, even with the losses on pot. Constellation next reports earnings on Sept. 27, with $2.62 per share of earnings expected on revenue of $2.3 billion. Beating those numbers should provide another boost.
The Bottom Line on STZ and CGC Stock
Under Newlands, Constellation sales and margins have been growing consistently for five years. A dividend initiated in 2015 at 31 cents per share has more than doubled, and now stands at 75 cents. The shares are up 132% in that time, an annual gain of over 25%.
Constellation has a market cap of $39 billion, so the Canopy Growth investment represents less than 10% of the total. Given the company’s track record, and the clear logic of its premium brand strategy, analysts insist their patience will be rewarded.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available 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.
