Constellation Brands reduces profit prospects, in part, on the costs of the canopy growth agreement


Cannabis plants are seen from an overhead viewing window at the Tweed Visitor Center at Canopy Growth in Smiths Falls, Ont., On September 18, 2018.

Fred Lum / The Globe and the Mail

Constellation Brands Inc., a North American wine and beer giant that has garnered worldwide attention with a $ 4 billion investment in Canada's largest marijuana producer last year, cut its 2019 fiscal outlook as a result of the costs associated with wake up.

Constellation, whose stock price sank 12.5 percent to $ 150.94 on Wednesday, reduced its projections amid weak sales of liquor and distillate and a 0.25 percent increase in higher interest rates linked to investment in Canadian cannabis producer Canopy Growth. Corp.

Still, Bill Newlands, the new chief executive and current president of Constellation, told analysts the company remains optimistic about the cannabis business.

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"We believe that the emerging space for cannabis represents one of the most significant global growth opportunities of the next decade and, frankly, our life," he said.

Constellation, known for its Corona beer and Robert Mondavi wine, was one of the first liquor companies to enter the fast-growing cannabis market with its Canopy investment, starting in the fall of 2017 and boosted a year later. This has led other consumer product manufacturers to rush to find their own marijuana business.

However, marijuana stocks have plummeted since recreational marijuana became legal in Canada in mid-October as marijuana retailers face a shortage of products and lower-than-expected sales.

In November, Canopy posted worse-than-expected quarterly results, causing its shares to fall 9% on the day and reducing Constellation's marijuana producer's fair value by $ 164 million.

However, Canopy shares rose more than 13 percent on Wednesday after brokerage firm Piper Jaffray began covering the cannabis sector with an upbeat report. Piper Jaffray analyst Michael Lavery predicted that the world marijuana market could be worth up to $ 500 billion. "While it is difficult to predict further changes, the pace of legalization seems to be accelerating," he wrote.

Because recreational marijuana is illegal in the United States, banks have resisted investing in the industry, although 10 states in the US and Canada have legalized the product.

Still, Constellation's Newlands said that recent US legislative reforms have legalized industrial hemp production, including cannabidiol or CBD, a compound of non-psychoactive marijuana that is believed to have significant medical benefits. Companies like Constellation and Canopy are investing heavily in the production of CBD-infused beverages and foods; It is expected that Canada will begin to allow the sale of some food infused with cannabis and non-alcoholic beverages by the end of this year.

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Still, analyst Bonnie Herzog of Wells Fargo Securities said that "the US government may adopt an unfavorable regulatory framework," suggesting that it may not facilitate the operation in the cannabis sector. At the same time, she urged long-term investors to take advantage of Constellation's write-down, in part because Canopy's investment is still "an opportunity."

Newlands said that Canopy is using Constellation's investment resources to strengthen its global leadership in the cannabis sector with strategic partnerships and acquisitions. As a result, he is confident that Canopy will reach its $ 1 billion revenue goal in 18 months, he said.

David Klein, chief financial officer of Constellation, said he would only issue his warrants – or options – to buy more shares of Canopy in November 2021, "if it makes sense and the deal unfolds as we expect."

"So if this business is going well, we think our investors will be happy to be able to carry out these warrants," Klein said. "And if the deal is not going well, we'll have a lot more money to get back to our investors."

Lauren Lieberman, an analyst at Barclays Bank, pointed to the market's concern at the extent to which Constellation's profit could be hurt next year and beyond the investment in Canopy.

Klein said that Constellation expects Canopy to generate "very attractive" operating margins, similar to those of packaged consumer goods companies. In addition, "there will be problems in your business with investments in R & D [research and development] and the cost of opening up additional markets, "he said. Constellation expects the Canopy transaction to increase earnings by fiscal year 2021.

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Constellation has not provided financial forecast for Canopy's business because it will release its year-end results in mid-February, after which Constellation will provide guidance, Klein said. He expects "surplus returns on our total investment in Canopy."


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