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Constellation Brands Still Believes in the Cannabis Boom

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Could the cannabis sector boom again? Many investors and analysts are asking this question in 2020. The sector bottomed out in 2019 after a tremendous success in 2018. Cannabis stocks soared after Canada legalized marijuana in 2018. Notably, the demand for marijuana was already there. Access to legal cannabis was the icing on the cake. Cannabis stocks made profits and stocks rose. However, cannabis companies struggled in 2019. Canopy Growth (NYSE:CGC) (TSE:WEED), which made a mark in the industry, was disappointing in 2019. Constellation Brands (NYSE:STZ) hasn’t lost hope. The company still believes in the cannabis boom.

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Constellation Brands reported a loss from Canopy Growth

On January 8, Constellation Brands reported its results for the third quarter of fiscal 2020. The company reported equity losses of $0.25 per share from its Canopy Growth investment. Constellation Brands reported a loss for the third consecutive quarter due to its investment in Canopy Growth.

Constellation Brands invested $4 billion in Canopy Growth in 2017. Since then, the company has recognized $223 million worth of unrealized net gains on a reported basis. In Constellation Brands’ post-earnings report, we discussed how the company recognized a $534 million decrease in the fair value of its investments from Canopy Growth in the third quarter. Constellation Brands also saw a reduction in the fair value of its investment in the first and second quarters of fiscal 2020.

Keeping in mind the losses in the second quarter, Constellation Brands announced in November last year that it won’t increase its investment in Canopy Growth. Currently, the company holds warrants to buy Canopy Growth shares before they expire in May 2020 and November 2023. The losses going forward or profit from Cannabis 2.0 sales will determine whether Constellation Brands uses the warrants.

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Possible cannabis boom

Despite the losses, Constellation Brands thinks that Canopy Growth could become a leader in global marijuana sales. Canopy Growth stands out due to its product differentiation. Previously, I discussed how Canopy Growth spent a considerable amount of money on research and development to develop the best products that suit consumers’ needs. The company also made strategic acquisitions to capture the cannabis beverage market, which it believes will have a large consumer base. The company’s deal with Acreage Holdings will strengthen its position in the US market.

Constellation Brands thinks that illegal black market marijuana sales will decline soon. Data by Statistics Canada show that legal cannabis sales increased from 23% in 2018 to 50% in 2019. Constellation Brands thinks that the increase in retail stores and the variety of vape, edibles, and beverage products that Canopy Growth launched will drive its growth this year. Also, Constellation Brands thinks that the recent hire of its CFO, David Klein, as Canopy Growth’s CEO, will help the company strategize in a disciplined manner. In my opinion, all of these factors give Constellation Brands confidence in Canopy Growth.

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I think that with Constellation Brands’ investment and faith in Canopy Growth, the company could drive growth this year and increase its profitability. Compared to Aurora Cannabis (NYSE:ACB), Canopy Growth might be in a better place when it comes to cash on hand and debt burden. Aurora Cannabis has spent a considerable amount of money on acquisitions and developing its production facilities, which increased its debt.

Analysts’ projections for Canopy Growth’s performance

Canopy Growth will be reporting its third-quarter results next month. Analysts still have bearish predictions for Canopy Growth and peers’ revenue and profitability. For the third quarter, Canopy Growth could report a sequential decline in its revenue to 103.5 million Canadian dollars and a negative EBITDA of 113.6 million Canadian dollars.

The following are analysts’ revenue and profitability projections for fiscal 2020.

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  • Canopy Growth could report revenue of 404.5 million Canadian dollars and an EBITDA loss of -455.1 million Canadian dollars.
  • Aurora Cannabis could report revenue of 381.6 million Canadian dollars and an EBITDA loss of 102.4 million Canadian dollars.
  • Cronos Group could report revenue of 47.9 million Canadian dollars and an EBITDA loss of 71.5 million Canadian dollars.
  • HEXO (TSE:HEXO) could report revenue of 81.1million Canadian dollars and an EBITDA loss of 57.1 million Canadian dollars.

I don’t think that analysts’ projections entirely reflect how Cannabis 2.0 revenues will turn out. Many factors could still be a threat. There could be a delay in store openings in Canadian provinces. Supply issues could lead to increasing black market sales and regulatory issues.

Will the cannabis sector see a comeback in 2020?

However, the overall opinion regarding the cannabis industry still looks positive this year. Recently, Raymond James analyst Rahul Sarugaser said that he thinks that the sector will rebound this year due to Cannabis 2.0. Ontario has allowed additional legal stores to open. However, regulations could cause delays. The cannabis sector’s comeback might not happen until the fourth quarter of fiscal 2020. The analyst also said that many smaller cannabis companies could face bankruptcy. Their prices fell last year due to the demand and supply imbalance.

In contrast, Purpose Investments COO Greg Taylor thinks that the cannabis sector could struggle this year due to overcapacity. He thinks that the industry could see mergers, consolidations, and bankruptcies.

However, Sarugaser and Taylor both sounded confident and bullish about Canopy Growth. Recently, Jim Cramer, CNBC’s Mad Money host, also favored the idea of David Kline driving Canopy Growth to success. Notably, Cramer is bullish on CGC stock.

Canopy Growth has a sound plan for the future. With analysts’ optimistic views about the company’s growth, we’ll have to see if it lives up to the expectations. Canopy Growth has a footprint in Canada. The company has also spread its marijuana business globally. The growth will determine if Canopy Growth stock recovers from the losses last year. The stock lost 25.4% in 2019. However, 2020 has started on a positive note.

As of Wednesday, Canopy Growth stock has risen 18.0% YTD (year-to-date). Aurora Cannabis stock has fallen 5.0%, Cronos Group has risen 8.7%, and HEXO has risen 16.3% YTD.

Stay with us to learn more about the cannabis industry.

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