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Cannabis-Connected

This international producer and marketer of beer, wine and spirits is readying for the introduction of its cannabis-infused, non-alcoholic drink when “edibles” become legal later this year. But it still continues to streamline its core operations.

Constellation Brands Inc., $199.90, symbol STZ on New York (Shares outstanding: 191.6 million; Market cap: $38.3 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 the company 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 first quarter, ended May 31, 2019, rose 2.4%, to $2.10 billion from $2.05 billion a year earlier. Earnings fell 0.8%, to $429.8 million from $433.3 million. Due to fewer shares outstanding, earnings per share improved 0.5%, to $2.21 from $2.20. However, it you disregard a $0.20-a-share loss from Canopy, Constellation earned $2.40 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.

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 $11.7 billion as of May 31, 2019. That’s equal to 31% of its market cap. It also held cash of $98.7 million.

Excluding unusual items and any contribution from Canopy, Constellation now expects to earn between $8.65 and $8.95 a share for all of fiscal 2020. The stock trades at 22.7 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 1.5%.

Constellation Brands is okay to hold.