Cannabis-Connected
As the alcoholic beverage market is threatened by a general decline in alcohol consumption, this firm is positioning itself for a more diversified future. It’s doing this through a growing partnership with a premium marijuana brand to sell cannabis products and cannabis-infused drinks.
Regulatory Risks and Implications for the Cannabis SectorAs Constellation Brands continues to navigate its foray into the cannabis industry, it is essential to consider the regulatory landscape that governs cannabis products in both Canada and the United States. While Canada has legalized recreational cannabis and is working to establish a comprehensive framework for cannabis-infused products, the U.S. remains a patchwork of state laws with no federal legalization. This discrepancy creates significant risks for companies like Constellation, which may find their investments hampered by sudden changes in regulatory policies. Investors should remain vigilant, as any federal action could dramatically alter the market dynamics, potentially impacting Constellation’s strategic initiatives and partnerships with firms like Canopy Growth.
Moreover, as public sentiment shifts and more states consider legalization, the regulatory environment may evolve in unpredictable ways. The potential for regulatory missteps or delays in product approvals could stymie Constellation’s plans to launch cannabis-infused beverages in the U.S. market. Investors must weigh these risks against the potential rewards of entering a burgeoning market, as the interplay between regulation and market demand will shape the future profitability of cannabis-related ventures.
Constellation Brands Inc., $189.52, symbol STZ on New York (Shares outstanding: 191.6 million; Market cap: $36.3 billion; www.cbrands.com), is an international producer and marketer of beer, wine and spirits. Founded in 1945, Constellation has more than 100 brands in its portfolio, owns 40 wineries, breweries and distilleries, and employs 10,000 people.
The company is the largest multi-category supplier (beer, wine, spirits) of alcoholic beverages in the U.S. and the third-largest beer company in the U.S. In fiscal 2019 (ended February 28, 2019), beer accounted for 64% of total revenue, wine 31%, and spirits 5%. International sales (primarily from Canada) accounts for roughly 3% of the company’s revenue.
Constellation’s well-known brands include Corona, Modela, Pacifico, Ballast Point, Funky Buddha, Robert Mondavi, Ruffino, 7 Moons, Svedka Vodka, High West Whiskey, Casa Noble Tequila, Black Velvet, and Paul Masson.
The company’s CEO is Robert S. Sands, and the Sands family holds controlling interest.
Constellation continues to position itself at the premium (high-profit-margin) end of the alcoholic beverage market.
Since acquiring exclusive brand rights to Corona in 2013, the company has invested $2.9 billion in its Mexican beer brands. Production capacity in Mexico has increased 240% during that time, from 10 million to 34 million hectolitres. The company recently introduced Corona Premier and Corona Familiar, two specialty brands aimed at the high-end beer market.
In its Wine and Spirits segment, Constellation has expanded its portfolio of higher-profit-margin brands through acquisitions: Casa Noble tequila in 2014, Meiomi wines in 2015, Prisoner super-luxury wines in 2016, Charles Smith wines in 2016, High West craft whiskeys in 2016, and Schrader Cellars in 2017.
The company entered the growing craft beer market by acquiring Ballast Point in 2015 and Funky Buddha in 2017.
In 2016, Constellation sold off its lower-margin Canadian wine business.
Largely as a result of its recent acquisitions, overall revenue increased 34.6%, from $6.03 billion in 2015 to $8.12 billion in 2019.
Earnings during those five years soared 309.4%, from $839.3 million to $3.44 billion. Due to fewer shares outstanding, per-share earnings gained 321.3%, from $4.17 to $17.57.
If you exclude all unusual items, Constellation’s earnings per share rose 6.7%, to $9.28 in fiscal 2019 from $8.70 in 2018.
In November 2017, the company acquired a 9.9% stake in Canopy Growth Corp. for $190 million. The Canada-based firm sells cannabis products under the Tweed brand. The two companies plan to work jointly on cannabis-infused drinks in the future.
The partners aim to initially sell those drinks in Canada given expectations Ottawa will legalize edible and drinkable cannabis products in October 2019. They will not sell those edibles (or cannabis itself) in the U.S. until the U.S. federal government changes its marijuana laws.
Canopy and Constellation recently expanded their strategic relationship. On November 1, 2018, the company purchased an additional 104.5 million Canopy shares at $48.60 a share, for a total of $5.1 billion. That raised Constellation’s stake in Canopy to 36.6%. It will also nominate four directors to Canopy’s seven-member board. As well, the company received warrants to purchase additional Canopy shares over the next three years.
Canopy recently agreed to acquire U.S.-based cannabis producer Acreage Holdings, Inc. (Over-the-counter symbol ACRGF). Acreage shareholders will receive $300 million in cash, but only if the U.S. federal government legalizes cannabis.
Due to the Acreage deal, Constellation agreed to adjust the terms of its warrants. If Constellation exercises all of them, it would own just below 50% of Canopy, instead of over 50% under the old terms.
Meantime, Constellation’s sales in its fiscal 2020 second quarter, ended August 31, 2019, rose 2.0%, to $2.34 billion from $2.30 billion a year earlier. The company lost $2.77 a share (or a total of $525.2 million) in the quarter compared to a profit of $5.87 a share (or $1.15 billion) a year earlier.
If you disregard unusual items and a $0.20-a-share loss from Canopy, Constellation earned $2.91 a share in the latest quarter.
The alcoholic beverage industry is highly competitive and is threatened by a general decline in alcohol consumption. Constellation is particularly dependent upon its Mexican beer brands and brewing facilities. The company also faces risk from its growth-by-acquisition strategy.
Consumer Trends in Alcohol and Cannabis ConsumptionUnderstanding consumer preferences is crucial for evaluating Constellation’s future in both the alcoholic beverage and cannabis markets. Recent trends indicate a shift in consumer behavior, with younger generations increasingly favoring low-alcohol, health-conscious options, including cannabis-infused products. This transition suggests that the demand for traditional alcoholic beverages may continue to decline as consumers seek alternatives that align with their lifestyle choices, such as wellness and moderation. Constellation’s strategic partnership with Canopy Growth positions it advantageously to cater to this evolving market by offering products that blend alcohol with cannabis, appealing to both traditional consumers and newcomers interested in cannabis.
Furthermore, the growing acceptance of cannabis as a legitimate alternative to alcohol presents a unique opportunity for Constellation to capture new market segments. By leveraging its established distribution channels and brand equity, the company can effectively introduce cannabis-infused beverages that target health-conscious consumers looking for enjoyable but less intoxicating options. As consumer preferences evolve, Constellation’s ability to adapt and innovate within this dual-market landscape will be critical to its long-term success and sustainability.
However, Constellation Brands has successfully positioned itself at the centre of the premium market. As well, cannabis-infused beverages offer growth potential and the company hopes to be one of the first to bring its product to market when these products become legal. (Both Molson Coors and Heineken also plan to launch cannabis-infused beverages.)
Constellation’s partnership with Canopy Growth also gives the company a head-start in the evolving cannabis-product industry—both in Canada and internationally as medical and recreational marijuana become legal in more and more countries.
The company is now selling 30 of its value-priced wine brands, including Clos du Bois and Mark West, to California-based E. & J. Gallo Winery for $1.7 billion. Demand for those wines has suffered as consumers switch to premium wines. Constellation expects to complete the sale by the end of fiscal 2020.
The company will apply the proceeds to its long-term debt, which totaled $12.2 billion as of August 31, 2019. That’s equal to 34% of its market cap. It also held cash of $81.3 million.
Excluding unusual items and any contribution from Canopy, Constellation now expects to earn between $9.00 and $9.20 a share for all of fiscal 2020. The stock trades at 20.8 times the midpoint of that range. With the May 2019 payment, the company raised its quarterly dividend by 1.4%, to $0.75 a share from $0.74. The new annual rate of $3.00 yields 1.6%.
International Expansion Opportunities for Cannabis ProductsAs the cannabis industry continues to grow, Constellation Brands should also explore international expansion opportunities beyond North America. Many countries are beginning to relax their cannabis laws, creating fertile ground for companies looking to expand their market presence. For instance, nations in Europe, such as Germany and the Netherlands, are increasingly open to cannabis products, both for medicinal and recreational use. Constellation’s partnership with Canopy Growth could provide a strategic advantage in entering these emerging markets, allowing the company to leverage Canopy’s existing relationships and knowledge of local regulations.
Additionally, there is a burgeoning interest in cannabis products in parts of Asia and South America, where legal frameworks are evolving. By proactively engaging in these international markets, Constellation could capitalize on first-mover advantages, establishing brand recognition and market share before significant competition arises. However, expanding into these regions requires a thorough understanding of local regulatory conditions, consumer preferences, and potential barriers to entry. Investors should monitor Constellation’s international strategy closely, as successful expansion could significantly enhance the company’s growth trajectory and resilience in the face of domestic market challenges.
Constellation Brands is okay to hold.
