8 Oct

Canopy Growth: Good Investment for Constellation Brands?

WRITTEN BY Sushree Mohanty

Canopy Growth (CGC) (WEED) has a huge investment from Constellation Brands (STZ). In the earnings for the second quarter of 2020, Constellation Brands booked losses due to the investment. Was the investment in Canopy Growth a wise decision? Let’s see what Constellation Brands thinks.

Constellation’s investment in Canopy Growth caused losses

On October 3, Constellation Brands reported its results for the second quarter of 2020. In the earnings call, Constellation Brands discussed its return on investment in Canopy Growth. Constellation Brands has a 35% stake in the company.

Constellation Brands incurred a loss of $484.4 million from its investment in Canopy Growth. However, excluding the losses, the company reported a profit of $2.91—1% growth year-over-year. The company also reported a loss in the first quarter as well due to the investment.

However, Constellation Brands had a strong performance from its beer business. The net sales from the beer business rose 2% to $2.3 million. The company also increased its EPS guidance for fiscal 2020. Now, Constellation Brands expects the EPS to be $9.00–$9.20—up from the previous estimate of $8.65–$8.95.

What does Constellation Brands think?

Despite Constellation Brands’ losses, the company still has an optimistic outlook for Canopy Growth. Constellation Brands is happy with Canopy Growth’s progress and growth initiatives. The company is excited about Canopy Growth launching value-added and higher-margin products for Cannabis 2.0. Canopy Growth will launch a variety of drinks, edibles, and baking products. The company is also developing its portfolio of CBD products. The products include beverages, edibles, oils, and soft gels as well as skincare, cosmetics, and therapeutic creams. Some of the products will be for humans and animals. The products will be produced in partnership with Martha Stewart.

Constellation Brands also talked about how shareholders overwhelmingly approved the Canopy Growth and Acreage Holdings merger. The merger will mark Canopy Growth’s entry into the US cannabis market after federal marijuana legalization.

On the other hand, PepsiCo (PEP) isn’t as keen about entering the cannabis market. On October 3, PepsiCo’s vice chairman and CFO, Hugh Johnston, spoke on Yahoo Finance’s The First Trade. He said, “We don’t have any plans to enter that category [cannabis] at this time. I still think it’s very nascent and think we will sort of let that evolve before we declare any specific plans in that category.”

Coca-Cola (KO) executives also want to wait and see how the cannabis industry evolves before making expansion decisions. Anheuser-Busch InBev partnered with Tilray (TLRY) to produce CBD-infused beverages.

Grand View Research estimates showed that the legal marijuana market could grow 23.9% compounded annually to $66.3 billion by the end of 2025. We think that the estimate could push beverage companies to enter the cannabis market.

Cannabis industry’s outlook

Last week, The Street reported that MKM Partners discussed the cannabis industry. MKM thinks that the cannabis sector will take time to deliver positive EBITDA due to higher operating expenses. Also, net sales acceleration isn’t expected sooner.

In other news, the CATO Institute provided an online survey that supported cannabis. The survey showed that 55% of Americans support decriminalizing drug-related offenses, while 44% oppose it. The results also showed that 69% of Democrats and 54% of Independents support decriminalizing drug-related crimes. Meanwhile, 59% of Republicans oppose decriminalizing drug-related crimes.

Last week, New Frontier Data suggested that if the cannabis industry gets federal legalization, it could produce close to $130 billion in additional tax revenues and over 1 million jobs nationwide. Read Cannabis Legalization: Is It Time for the US to Act? to learn more.

After Constellation Brands’ results on October 3, Canopy Growth stock fell 2%. Constellation Brands stock fell 0.27%. Canopy Growth stock fell 3.8% last week.

The cannabis industry had mixed news last week. Many other cannabis stocks were also trading in the red last week.

Aurora Cannabis (ACB) stock fell 5% last week. The company provided an update on its global operations and growth initiatives. Aurora Cannabis said that Aurora Sun and Aurora Nordic’s construction is nearly complete. The facilities will help the company produce quality cannabis at low costs.

Cannabis 2.0 will take effect in October. Aurora Cannabis’s Aurora Polaris facility is nearly complete. The facility will produce edibles and vape products. The company also plans to grow cannabis outdoors. Read Cannabis 2.0: Aurora Cannabis Gears Up for Edibles Market and Why Aurora Cannabis Wants to Grow Cannabis Outdoors to learn more.

What do we think?

Other beverage companies are hesitant about entering the cannabis market due to volatility in the industry. However, Constellation Brands is confident about its investment. The company expects Canopy Growth to be profitable. Will Canopy Growth be able to deliver? We’ll have to see how Canopy Growth gains from its expansion after Canada legalizes edibles. Read Canopy Growth: Getting Ready for Cannabis 2.0 to learn more.

For more cannabis-related news and updates, visit 420 Investor Daily.

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