There's no question which company has been the biggest winner so far from the partnership between Canopy Growth (CGC +1.80%) and Constellation Brands (STZ 2.40%). Canopy is in a much stronger financial position than it would otherwise be thanks to big investment from Constellation. On the other hand, Constellation's earnings growth has been weighed down by its stake in Canopy Growth.
The two companies are now joined at the hip, with Constellation owning around 37% of its cannabis partner. But which of these stocks is the better pick now?
Image source: Getty Images.
The case for Canopy Growth
It's easy to focus on the challenges that Canadian marijuana stocks currently face. The retail infrastructure in Canada still isn't close to what it needs to be. The Cannabis 2.0 market will likely gain momentum more slowly than hoped. Canadian cannabis producers still can't legally enter the huge U.S. marijuana market.
But to focus only on those issues is nearsighted. Although the legal cannabis market might hit speed bumps along the way, it will still undoubtedly expand significantly over the next several years. And Canopy Growth is arguably better positioned than any other company to profit from this expansion.
While several of its peers delivered dismal results in their most recent quarterly updates, Canopy reported blowout Q3 results. It trounced analysts' top- and bottom-line estimates. Although the company still lost money, its bottom line is trending in the right direction thanks to strong sales growth coupled with Canopy's cost-cutting initiatives.
Canopy Growth's future should be even brighter. Ontario plans to license a lot of new stores beginning this month. Despite delays in launching its cannabis-infused beverages, Canopy thinks its new products could be game-changers when they reach the market. The company continues to perform well in key European medical cannabis markets, especially Germany.
Don't overlook Canopy's U.S. prospects, either. The company recently launched its first hemp-derived CBD products in the U.S. and plans to roll out additional products this year. Depending on the outcome of the elections in November, the U.S. could be headed toward legalizing pot at the federal level as well. Canopy Growth is in a position to pounce if that happens, thanks to its deal to acquire U.S.-based Acreage Holdings.
Canopy's new CEO, David Klein, will almost certainly steer the company on a clear path to profitability. Klein previously served as Constellation's CFO and is fully aware of how important it is to Canopy's big partner to stem the bleeding.
The case for Constellation Brands
While Canopy Growth hopes to make major inroads into the U.S., Constellation Brand absolutely dominates the U.S. premium beer market. Its Corona, Modelo, and Pacifico beers continue to enjoy solid sales momentum. New products such as Corona Premier and Corona Refresca have boosted that growth.
More innovative new products are on the way. Constellation will soon launch its Corona Hard Seltzer brand. The company also recently acquired minority ownership of Press Premium Alcohol Seltzer. With these products, Constellation should be in a good position to become a leader in the fast-growing seltzer market.
The company's wine and spirits brands aren't performing as well, though. But Constellation is selling off some of its brands to streamline its lineup as part of an effort to focus only on premium brands. This strategy could pay off over the next few years.
Constellation's stake in Canopy Growth has been its biggest sore spot. However, Constellation's executives continue to believe that the global cannabis market will grow significantly and that Canopy will be a top player in the market.
Despite the top-line drag from its wine and spirits business, Constellation delivered 1% year-over-year revenue growth in the third quarter. Its attributable net income jumped 19% higher. Even better, the company upped its earnings guidance for fiscal 2019.
One other draw for investors considering Constellation Brands is its dividend. Its dividend currently yields north of 1.5% -- not splashy but not bad, either.
Better buy
With more opportunities for growth on the way and an improving bottom line, aggressive investors could find Canopy Growth to their liking. However, my view is that Constellation Brands is the better pick.
Constellation is already profitable and continues to grow even in a challenging beverage alcohol market. I expect the company's new seltzer products will be big hits. I also think Constellation's wine and spirits business will turn around. For investors who want to profit from the cannabis boom, Constellation's significant stake in Canopy Growth provides a less-risky way to do so than buying a pure-play marijuana stock.
Canopy Growth could be a big winner over the long run. But that will make Constellation Brands a big winner, too. And if Canopy isn't as successful, Constellation's core businesses should grow anyway. I think the stock offers a win-win proposition.
