Canopy Growth (NYSE:CGC) reports its second-quarter results on Nov. 9. While most investors are focused on the cannabis company’s marijuana sales during the quarter, I continue to see progress in its beverage business. That’s great news if you own CGC stock.
A Reasonably Priced Acquisition That’s Doing Nicely
It’s been a little over a year since Canopy acquired 72% of BioSteel Sports Nutrition Inc., the Toronto-based maker of sports nutrition drinks. Canopy paid approximately 47.7 million CAD ($35.8 million) for its majority stake in the company. Based on the price paid for 72%, the acquisition valued BioSteel at 66.3 million CAD ($49.7 million).
What did it get for that relatively small outlay?
Well, consider that Canopy paid 342.9 million CAD ($253.7 million) in May 2019 for C3, a German company that manufactures dronabinol, the first cannabinoid product eligible to be prescribed by physicians. In 2018, C3 had 41.5 million CAD ($30.7 million) in sales from dronabinol and four other medicines.
At the time of the BioSteel acquisition, while Canopy didn’t reveal the drink maker’s annual sales, BNN Bloomberg reported that the market for CBD-infused drinks was expected to grow from $227 million to $1.4 billion in 2023.
“This is an opportunity to take a proven product, one with scientific rigour and used by renowned names and athletes from around the world…and take that, layer in CBD and the pieces we bring, such as our war chest and a focus on scaled cannabis production,” then chief executive officer Mark Zekulin said in an October 2019 phone interview.
As I noted at the time, BioSteel was popular with many high-profile athletes, just one of the many reasons I thought it was a brilliant move by the company.
“[I]t gets Canopy into the very competitive sports nutrition and hydration market, with a company whose customers, its press release suggests, include ‘70% of the teams in North America’s four major sports leagues,’” I wrote on Oct. 4, 2019.
“Connor McDavid, Brooke Henderson, Wayne Gretzky, Eugenie Bouchard, and Dallas Cowboys star running back, Ezekiel Elliott, are all brand ambassadors.”
I argued at the time that there was no way Constellation Brands (NYSE:STZ) would have allowed the acquisition to happen if the beverage giant was retreating from its investment in Canopy Growth.
BioSteel’s made some big announcements since then.
Patrick Mahomes Doesn’t Hurt
On Aug. 4, BioSteel announced a partnership with Kansas City Chiefs quarterback sensation Patrick Mahomes.
“I have been using BioSteel’s products for years, and I love that its products are all-natural and sugar-free,” says Mahomes. “I’ve been fortunate enough to be educated on sports nutrition by the best, and I want to pass along this knowledge to today’s youth,” Mahomes stated in the August press release.
BioSteel continues to make inroads into the U.S. By having Mahomes on board to help push the product will be helpful.
On Oct. 28, the Dallas Mavericks announced that BioSteel was the team’s official sports drink. The exposure at both the team’s arena and practice facility will deliver future gains from consumers eager to try its regular and CBD-infused sports nutrition drinks. As the ad says, that’s priceless.
It also helps that Constellation has excellent distribution connections.
On Oct. 13, BioSteel announced that it had signed distribution deals with Reyes Beer and Manhattan Beer to distribute its products throughout the country.
“BioSteel has seen monumental growth and success in their category and has become the go-to brand for pro athletes and fitness-minded consumers alike,” said Bill Deluca, Chief Commercial Officer of Manhattan Beer. “We’re proud to bring the official sports drink of the Brooklyn Nets, Barclays Center and our star Yankees shortstop, Gleyber Torres to New Yorkers.”
This is a deal that probably doesn’t happen without the input of Constellation.
The Bottom Line on CGC Stock
In early October, I argued that Canopy Growth remains an excellent value play for investors patient enough to wait for their rewards.
Thanks to a combination of good news from the company and the cannabis industry, CGC stock gained more than 44% from the beginning of October through early November.
Some of that good news was due to BioSteel. I continue to believe that it’s increasingly going to become a bigger part of the Canopy Growth pie in 2021 and beyond.
If you’re looking for a catalyst to drive CGC higher, one need not look any further than BioSteel for the evidence.
I continue to like Canopy Growth as a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.