Canada: Constellation Brands’ Beer, Cannabis Bets Make It An Intoxicating Stock Pick

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What’s better than a cold one after a long day? A beer-focused stock with room to grow.

Enter Action Alerts PLUS holding Constellation Brands Inc. The company recently trimmed expectations for its wine sales growth to low single digits, but according to Macquarie, this more realistic expectation leaves shares “undemanding” relative to earnings growth forecasts.

In the Feb. 22 note, Macquarie analyst Caroline Levy said she expects earnings over the next three years to grow at an average of 13% on organic sales gains of 7%.

Beer growth in fiscal 2019 will be driven by continued distribution gains at retail, more sales of cans and draught and the “well-supported” launch of Corona Premier and new packaging for Corona Familiar.

“In addition to the well-broadcast Corona Premier and Familiar launches, STZ will announce two new, alternative beverage alcohol (ABA) products at its Gold Network Summit in two weeks. Additionally, it has plans for a new domestic super-premium product within the year,” Levy wrote.

But beyond its strong, growing beer portfolio, Constellation made a bold entry into a burgeoning market: legal cannabis. In October, the company agreed to acquire a minority stake in Canopy Growth Corp., an Ontario-based medicinal cannabis products provider.

Macquarie noted that about $10 million of Constellation’s estimated $35 million tax reform-related cash benefit will go toward cannabis product development, which gives the company a “first-mover advantage in this nascent market,” analysts said.

So why does a cannabis play make sense for a spirits maker Constellation?

Cannabis is set for federal legality in Canada in July, and Constellation “expects that beverages will be legal soon thereafter,” said Bill Newlands, president and operating chief, at a conference in New York this week.

“This past year, we brought 40% — 40% of the total growth at retail in the alcohol beverage space, more than the next several players combined,” Newlands said. That means Constellation could bring that expertise to a newly legal cannabis market in the future.

“Our goal with this organization is to work collaboratively to both understand the cannabis business, but also develop unique cannabis-based beverages that will be available around the world as legalities prove those to be an option,” Newlands said.

“This is a big business,” Newlands added. There are eight states in the U.S. that allow recreational cannabis use and 22 that allow medical use. Newlands said Constellation estimates cannabis is already a $50 billion business in the U.S. alone.

“That’s half the size of our beer business,” he said. “That’s a pretty big business.”

Constellation Brands stock traded higher 0.25% to $214.33 early Thursday afternoon. Shares have rallied 35% in the last year.