The beer-and-wine company is being hit, in part, because one of its brands is Corona beer. Corona is a light lager from Mexico that has nothing to do with the virus.
But the move down also has another lesson. The pot premium is done. Constellation was being given a premium because of its $4 billion investment in Canopy Growth (NYSE:CGC), announced in 2018. Investors treated Constellation like a tech stock in 2019, strong even after Canopy itself fell.
That’s over. Constellation opened for trade March 3 at $178, a market capitalization of $33 billion. That’s down from about $40 billion before the shock. The premium it was getting over other pot stocks, and other beer and wine stocks, is gone.
Constellation may have lower to go. At its March 3 opening, it’s selling at roughly 4.6 times revenue, double the price-sales ratio of Anheuser-Busch InBev (NYSE:BUD). Even with its recent fall it’s selling at about 40 times trailing earnings. The yield on the 75-cent dividend is still just 1.7%.
It takes about $500 million in earnings to pay that dividend and if it weren’t for Canopy, Constellation stock would be a monster. But Canopy has racked up nearly 1.7 billion CAD in losses over its last three quarters, on revenue of about 300 million CAD. What was supposed to be a rocket engine has turned into a boat anchor.
Canopy stock is down 60% over the last year, but the impact on Constellation has been delayed. The coronavirus, then, was a good excuse for complete follow-through. Constellation is now worth 10% less than it was when the Canopy deal was announced. The average S&P 500 stock, even with the hard fall of the virus, is up 10% in that time.
What’s Next for Canopy?
Constellation hoped to offset the costs of the Canopy purchase by selling low-end wine brands like Clos du Bois, Black Box, Estancia, Mark West, Wild Horse, Franciscan and Ravenswood to E & J Gallo for $1.7 billion.
The Federal Trade Commission worried about concentration in the sparkling wine, brandy, dessert wine and concentrate categories. But the bottom line is that Constellation is getting half the cash it expected for debt repayment. The last time it reported earnings, Constellation had $11.3 billion of long-term debt.
When Constellation next reports results analysts are expecting about $270 million of net income, $1.63 per share, on revenue of $1.8 billion. A year ago, Canopy was a tailwind for Constellation earnings. Now it’s a headwind.
There’s more trouble ahead. Last year’s grape harvest in California was stellar, and tastes are changing. Younger drinkers have yet to embrace the complexities of wine, preferring things like hard seltzer. High supply, and low demand, is great for drinkers but bad for producers.
The Bottom Line on STZ Stock
Constellation looks poised for a harder fall or, at minimum, a harder time getting up.
Its collection of premium wines and Mexican beer is out of step with rapidly changing tastes. Its investment in Canopy is now dragging the stock down, not building it up.
Analysts have yet to catch on. TipRanks shows analysts reiterating their ratings with an average price target of $223, a 25% hike from its present level.
I wouldn’t bet on that.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.