The beer portfolio for Constellation Brands (NYSE:STZ) is performing as well as expected, but delays in selling its wine portfolio and the continued drag caused by its investment in pot producer Canopy Growth (NYSE:CGC) sunk the alcoholic beverage company in the second quarter.

Although Constellation -- the owner of U.S. distribution rights to the Modelo and Corona family of Mexican beers -- ultimately raised its guidance for the year (and it's likely the woes in the quarter are transient), its shares tumbled 6% on the news.

Woman researcher with marijuana plant

Image source: Getty Images.

Quarterly earnings skunked

Total sales rose 2% to $2.3 billion during the period, lifted in large part by the growing popularity of its Modelo beer brand, which saw 15% growth in depletions -- or sales to distributors and retailers, an industry proxy for demand. But it swung to a $2.77 million loss after a year-ago profit because it took an equity loss of $484 million on Canopy Growth, though on a comparable basis it was only $55 million. 

Even so, the marijuana grower is far underperforming Constellation's expectations, leading it to mark down $839 million of its $4 billion investment in Canopy. 

CEO Bill Newlands told analysts last quarter that he was displeased with the pot grower's performance. While the long-term outlook for the space was positive, Newlands said, "we were not pleased with Canopy's recent reported year-end results."

That led to Canopy CEO Bill Linton getting forced out of the company and being replaced by someone more to Constellation's liking: Mike Lee, the former wine division CFO who became Canopy's CFO in May. This time around, Newlands told analyst he was "pleased with the progress of the Canopy team and what they have done in the last few months." Still, there doesn't seem to be a way out of the hole it's in anytime soon.

Beer still bubbles

That morass distracted from the much better performance Constellation's beer portfolio registered, posting 6.2% depletion growth that -- when adjusted for the one selling day fewer in the quarter -- was actually a 7.5% gain.

Considering the overall beer industry is in decline and craft beer itself is growing only at low-single-digit percentages, Constellation's performance is remarkable. But it continues to hint at struggles for the Corona brand. Doubly so, in fact, since hard seltzer has stolen some of the momentum from Constellation's portfolio, and it is growing at triple-digit rates.

Constellation is late to the game, perhaps waiting to see if it would have the same "boom splat" results that hard soda did, but Newlands said he's convinced "seltzers are here to stay." The company will introduce its own version into the market in the spring. But it may not go as smoothly as it wants.

Ready to make a splash

While it's important to have a presence, Constellation is choosing to brand it under the Corona label rather than create a separate identity like Boston Beer did with its Truly brand or even Anheuser-Busch InBev with Bon & Viv (though it acquired that business).

Constellation's argument is that Corona is the No. 1 beer for Hispanics and it received exceptional acceptance of its flavored malt beverage (FMB) Corona Refresca despite Hispanics not having really migrated to FMBs generally. It believes it can bring them into the seltzer market with a Corona-branded offering.

Perhaps, but there is no real differentiation in seltzers these days. While analysts expect industry leader White Claw to lose a lot of share as more seltzers are introduced, it may be hard for any one brand to stand out, especially since they all essentially have the same label in terms of calories, carbs, and alcohol by volume. But Newlands remains confident Constellation's offering will excel.

Business is still booming

On wine, Constellation is still waiting for approval to sell its low-end portfolio to E&J Gallo Winery. Because both companies are the biggest in the space, the Federal Trade Commission is giving the transaction closer scrutiny. Constellation expects the deal will go through sometime in the third quarter.

So other than Canopy Growth's continued poor performance, Constellation's quarter was a solid one, and the hit its stock took is not completely warranted. The company said that excluding Canopy, it expects full-year earnings to be between $9 and $9.20 per share, up from its prior guidance of $8.65 to $8.95, and well ahead of the midpoint of Wall Street's forecast at $8.33 per share.

Constellation Brands looks like it will be able to ride its beer portfolio's popularity higher, even if its marijuana investment doesn't have the same buzz that it once did.