Constellation Brands (STZ 0.04%) (NYSE: STZ-B) falls after lowering guidance for 2019 thanks to a writedown in its investment in Canopy Growth (CGC +2.63%). Lennar wraps up its fiscal year by deferring guidance altogether.
In this episode of MarketFoolery, MFAM Funds portfolio manager Bill Barker analyzes the beverage and housing industries. Plus, we dip into the Fool Mailbag in search of coffee stocks.
A full transcript follows the video.
Check out all our earnings call transcripts.
This video was recorded on Jan. 9, 2019.
Chris Hill: It's Wednesday, January 9th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: Do you know what the word of the day is?
Barker: I do not.
Hill: The word of the day is guidance. Guidance looms over at least two-thirds of what we're going to talk about today. We'll start with Constellation Brands, which is the business in beverages, mostly. They've got a portfolio of brands in beer, wine, spirits. Corona is probably the best-known brand. Their third-quarter results were fine. But Constellation Brands lowered their guidance for 2019 due to weak sales in the wine portfolio, and, also -- wait for it -- yes, the $4 billion investment in Canopy Growth, the Canadian cannabis company that...I don't know, are we surprised that that $4 billion investment they made isn't paying off right now? That it, in fact, appears to be doing the opposite?
Barker: It's easy to say at this point, no, we're not surprised. At least I, on this podcast, didn't go out ahead of time and said at the moment of the purchase, "They're probably going to have to write this down by about $164 million in the first quarter." If I had done that, you'd be impressed.
Hill: I would be very impressed.
Barker: Did you scoff at it, if you covered it, at the time?
Hill: We did cover it at the time on this podcast. I remember two things. One, thinking, "Holy cow, that's a lot of money." I can see Constellation Brands making an investment of some size. But the $4 billion was what surprised me.
Barker: That's a lot of marijuana.
Hill: [laughs] Particularly since it's not like there aren't other opportunities for acquisitions or investments in the beverage industry, which is what they're good at. So the $4 billion surprised me. And I remember talking to David Kretzmann, who had gone to a cannabis conference up in Toronto. And one of the things he talked about was, when he was up there, this news got announced, and he said, "Boy, the Canopy Growth people were so excited." And I said, "Yeah, I bet they were." No one's surprised that they're excited. They got a check for $4 billion. What's more interesting is the Constellation Brands side of the equation.
Barker: Yes. There were hints at the time that they might be overpaying. Those have been realized by now. Not only are they writing down their stake, and that's a hit to earnings, but they're also revealing what the cost of the debt which they took on to fund the acquisition is going to be. That's going to knock $0.25 per share off the earnings this coming year, which is about 3% of the total earnings. Altogether, they're dropping guidance from a range of $9.62 to $9.75 a share to $9.20 to $9.30. About 4% is the reduction in their adjusted earnings. The stock's down a little bit more than that because on top of the fact that they're going to be earning less money, they're making this writedown. I think that the growth that somebody would have had penciled in for the company on an ongoing basis has to be tempered at this point.
Hill: Even with the drop today -- as you indicated, it's down about 9% right now -- and even with the drop from last year, right now, this stock is trading around $155 a share. Go back to late spring of last year, Constellation Brands was around $220. Even with that drop, this stock has still doubled over the last five years. This has been a strong operator, a strong acquirer of other brands. Again, I think that's part of what was so mystifying about the amount of the investment they made in Canopy Growth.
Barker: They've fueled a lot of this growth through acquisitions. I guess it was both playing a little offense and a little defense, and not playing them very well. [laughs] That's what we're looking at today. In two or three years, we may look at it differently and have to take back some of our snark about overpaying. Maybe it'll turn out that there is the market opportunity in marijuana that the company itself is saying is less than they thought it would be six months ago or whenever they finished paying for it.
It's a company that's definitely been a good investment over the last five years. A very good investment over the last five years. Even better over the last 10. You have to give them credit for that and not just dance upon their grave today --
Hill: I'm not dancing on their grave!
Barker: It looked like you were dancing. For those that are just listening, I sensed some dance steps. At any rate, expect them to grow until you come up with a different theory about the same rate as GDP. They're talking about wine and spirits being weak going forward and declining low single digits. They've got the beer and the investment in marijuana. All that maybe adds up to growth around the same rate as GDP. Possibly. Possibly weaker than that, given that wine and spirits is a big part of it and is mildly declining.
Hill: Let's move on to the housing market, where Lennar (LEN +1.23%) wrapped up its fiscal quarter. Lennar, I think it might be by some metrics the largest home builder in America. Fourth-quarter profits for Lennar came in higher than expected. Overall revenue a little lower than expected. That's not the news. The guidance for 2019, there is none. Have you heard of this before? To my memory, I haven't heard of a company coming out and saying, we're deferring guidance, and this is the quote here, "until the markets further define themselves."
Barker: I have not, off the top of my head.
Hill: I didn't even know that was an option in the playbook! Like, "You know, I know we've been giving guidance every quarter for all the years we've been a public company. But, eh, this time, we're just going to skip. We're going to pass."
Barker: I don't know Lennar's history well enough to say whether they have done it before, but they well might have back in 2008, 2009, or years afterwards, because it's a really hard place to guess what your future results are going to be in terms of sales. Let me give you a few numbers. This is in billions. This is the sequence starting in 2004 of their sales, top line. $10 billion, then $13 billion, then $15 billion, then $9 billion, then $4 billion, then $2 billion. The $2 billion was in 2009. Then they built back up, hanging around the $2-3 billion range for about five years. Now, they're back up to $11 billion. This is not the kind of business that lends itself to "Let's assume 5% growth. If we make an acquisition, it'll be a little better." No, no, no. Numbers will vary dramatically based on things that the company has little to no control over, like interest rates.
Hill: The stock is up almost 5% today. I'm surprised by that because so much of what drives a given company's stock when they report earnings is the guidance. So, the fact that Lennar came out and said, "We're not giving guidance," I would have thought that would have had some investors headed for the exits.
Barker: I'd agree with that. In trying to explain why the absence of guidance might be better than giving any, here are the numbers for the fourth quarter. Deliveries of homes were up 64% year over year. New orders 49%. The backlog of homes is up 85%. You can go down the various numbers. It was a great realized quarter, which is already in the books, already in the past. And the company is trading awfully low. It got beaten up last year. It's trading for about 6X-7X next year's expected earnings. That's the analyst consensus earnings, which may be raised or lowered based on the results today and the absence of guidance. This is a tough thing. As tough as it is for Lennar to give any guidance, imagine how much tougher it is for analysts to try to guess at what their next quarter is going to be.
You're right, guidance is the story of the day. The net guidance from these two companies is down. I think that's going to be a theme, as earnings season rolls along, that's repeated again and again. Companies are going to be lowering guidance.
Hill: Our email address is [email protected]. You can also follow the show on Twitter, @MarketFoolery is our Twitter handle. From Daniel Shelton, who writes, "You guys haven't talked coffee in a while. What are some good coffee stocks to own other than Starbucks (SBUX 0.07%) and Dunkin Brands (DNKN +0.00%)?" Is he right that we haven't talked coffee in a while?
Barker: Not as it relates to me. No. [laughs] Maybe in my absence from the show over most of the last month, you haven't been holding up your end. It sounds like it, according to your listeners.
Hill: That's probably the case, yeah. If we're looking at a trend chart, it's probably down because you've been out with your injury.
Barker: It's also possible that this email is not representative of all listeners. It's possible not everyone thinks, "You're not talking about coffee enough." Possible.
Hill: The dozens of listeners, pounding the table like, "God, when are they going to talk about coffee?! We need more of that!" But I will say, when I first read this from Daniel, "What are some good coffee stocks to own other than Starbucks and Dunkin Brands?" I thought, "Well, wait. What are good stocks to own?" In the same way that Jason Moser talks about a basket of stocks around the war on cash or something like that, I thought, "Are there four coffee stocks that you would put in a basket of coffee stocks?" I feel like, at least in the United States, and certainly in the case of Starbucks around the world, you're doing pretty well in terms of your coffee exposure if you own those two.
Barker: You could get up to four.
Hill: OK. You mentioned Keurig Dr Pepper (KDP +0.00%), which this morning got an upgrade from Goldman Sachs. And I know that I, more so than anyone else at this company, am quick to comment on a company rebranding. And as often as not, it's a negative comment, some level of snark. I'd like to put a request out to anyone connected to the Keurig Dr Pepper Corporation: you need a new name.
Barker: Really?
Hill: Yeah. [laughs]
Barker: We know some of what they do from their name, unlike some of the rebranding efforts that you've attacked.
Hill: But in this case, we had Dr Pepper merging with Snapple, then they were Dr Pepper Snapple. Then Keurig Green Mountain. Now, it's Keurig Dr Pepper.
Barker: You want all the words in the headline? Keurig Green Mountain Dr Pepper Snapple, owned by JAB?
Hill: [laughs] Exactly. Or, if they wanted to, just Qwikster: A JAB Holding Beverage Company.
Barker: Right. And JAB is a privately held German conglomerate.
Hill: Which, when you're talking about coffee, holy cow, do they have a lot of coffee!
Barker: Right. The reason why there aren't any stocks beyond essentially Starbucks, Dunkin' Donuts, the small part of Keurig Dr Pepper that you can get in on, and Farmer Bros, which is a small-cap roaster, is because JAB has basically bought up all the rest. They own Peet's and Caribou and Einstein Brothers and Krispy Kreme, Panera, Bruegger's, all of them, and most of Keurig Dr Pepper. They own 87% of it. It's a publicly traded stock you can invest in, but the owner is JAB for almost all of it.
Hill: I'd never heard of Farmer Brothers before. I'm just looking at the chart now. So this is about a $400 million company. They're just in the business of beans, is that it? They have a great ticker, FARM. That's a good ticker.
Barker: Yeah, I believe so. I raised the name without knowing every single detail about it, which is always dangerous in something that you've exposed here.
Hill: [laughs] You know what? Longtime listeners know to expect that on this show.
Barker: [laughs] What's nice about that is, on this show, we get to reveal our ignorance constantly. It's very different from going on TV, where you have to appear to be an expert on every answer that you give.
Hill: And, as you've mentioned before, when you go on TV, you're introduced as an expert because that's the move. Why else are you on TV?
Barker: Right. They're projecting the experience of watching experts, whereas you are not. What are you projecting here?
Hill: We're just trying to talk about stocks.
Barker: [laughs] We're just trying to be honest about things we know and things we don't know.
Hill: [laughs] Yeah, we're just trying to be honest.
Barker: We don't know if these brothers were farmers, or their last name was Farmer, or whether they're brothers at all. We don't know!
Hill: To go back to the stocks, again, if you've owned and held Starbucks and Dunkin Brands for the last few years, you've done well.
Barker: Yeah. And you did well with the other companies that JAB acquired because they paid up Panera, you'll recall, when they were bought. That was a nice bump for them.
Hill: Certainly, JAB Holdings has a history of paying a premium. Sometimes it's a very nice premium. I would have to go back and check, but my memory is that when -- for example, last week when you were on the show, we talked about the Bristol-Myers Squibb acquisition of Celgene. You made the comment that as a Celgene shareholder, you were happy because you were getting a nice premium. But if I'm remembering correctly, it didn't get you back to even.
Barker: Why do you have to bring that up?
Hill: [laughs] Because I think in the case of JAB Holdings, formerly public companies like Caribou Coffee, yeah, there was a buyout at the end with a little bit of a premium, but in general, if you were a Caribou shareholder, it was a Celgene-type situation.
Barker: Caribou was a longtime underperformer. Celgene was a company that had had, if you look over the entire history of its public existence, rewarded a lot of people, but certainly not in the last year. It had run into some difficulties. The purchase price probably only got people who had bought in the last few months back to even. In terms of Caribou, and maybe Krispy Kreme as well, you're looking at companies that really had not been well enough managed to have rewarded shareholders, unlike Panera, which was a very good long-term holding. Shareholders at the time probably had the expectation that they would continue to do well by holding it.
Hill: Do you know why Caribou was an underperformer as a stock?
Barker: I feel like there's a punchline here that I don't know. No, why was it? How bad was it?
Hill: The coffee wasn't good. It was that simple. I mean, that's just one man's opinion. But as someone who is a prodigious consumer of coffee, that was one coffee shop -- and continues to be a coffee shop -- that I'm happy to walk right by. I'll go in search of coffee elsewhere.
You can read more from Bill Barker and his colleagues, go to mfamfunds.com. Check out everything from Bill Barker, Bryan Hinmon, Charly Travers, Nate Weisshaar, the entire team at MFAM Funds. They're not writing about nonsensical coffee stuff, they're writing about actual investing. Check it out! Bill Barker, thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
