Constellation Brands (STZ) profits from cannabis in third quarter

On Wednesday, Jan. 8, Constellation Brands announced net earnings of $366.5 million for the third quarter of the fiscal year, resulting in a $71.1 million decrease in its investment in Canopy Growth.

The beverage alcohol company reported a loss on its investment in Canopy in all three quarters of its fiscal year 2020.

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Optimism comes to Constellation Brands

“We remain optimistic about the Canadian cannabis market as the conversion from the illicit to the legal market continues to strengthen,” CEO Bill Newlands told analysts during a conference call.

Constellation Brands stock, which has a market value of $36.2 billion, was still trading at 4% on Jan. 8, lunchtime after the company raised its adjusted earnings forecast for the full year.

The global legal cannabis market will be worth $13,346 billion by 2019, according to the Brightfield Group, and 80% of these sales will be made in the United States.

Financial forecasts for Constellation Brands and Canopy Growth

Constellation Brands invested $4 billion in Canopy in October 2017, but last year Newlands said it was not satisfied with Canopy’s results. In December, the brewer announced that CFO David Klein would be the new CEO of Canopy, effective Jan. 14.

Newlands told analysts that Klein would bring “more focus and discipline” to the company.

Overall, Canopy shares were down 30% from last year. The company has not yet turned a profit and is investing heavily in its expansion. Newlands still thinks there’s hope.

In October, a year after allowing recreational use of marijuana, Canada legalized edible products and marijuana drinks – products with higher profit margins, presenting an opportunity for Canopy.

Infused cannabis products bring hope to cannabis companies

Canopy deploys its own vapes and edibles, as well as cannabis-infused drinks made with Constellation Brands.

“We couldn’t be happier to see these products on the market,” said Newlands.

The Modelo brewer’s gamble on cannabis came at a time when beer consumption in the U.S. was declining and legalized cannabis was perceived as a threat to all categories of alcohol.

Some health-conscious consumers avoid alcohol altogether. Those who still drink choose spirits, higher value wine, premium beer or hard seltzer, the biggest trend for alcohol in the summer.

Constellation Brands launches other drinks and products despite losses

To capitalize on this trend, Constellation plans to launch a Corona brand hard seltzer in early fiscal 2021. Other options include Bon & Viv from Anheuser-Busch InBev, and Truly from the Boston Beer Company.

Constellation Brands also sold part of its portfolio to respond to changing consumer tastes. In December, the company announced an agreement to sell its Ballast Point beer brand.

Excluding the loss on the Canopy investment and other items, Constellation Brand’s adjusted quarterly earnings of $2.14 per share exceeded analyst estimates by $1.85 per share. The company reported revenues of $1.99 billion, exceeding Wall Street expectations by $1.95 billion.

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(Featured image by Jed Owen via Unsplash)

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