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Canopy Growth Continues to Weigh on Constellation Brands' Performance

By Rich Duprey – Jan 9, 2022 at 6:46AM

Key Points

  • Constellation Brands' beer sales continue to show strength, with Corona and Modelo depletions surging.
  • Canopy Growth continues to cause mounting losses for the drinks maker.
  • A new partnership with Coca-Cola for RTD beverages may not do much to help.

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Beer, not pot, is the alcoholic beverage maker's strength, but the cannabis stock keeps generating losses.

Corona beer owner Constellation Brands (STZ -0.08%) beat Wall Street's projections for sales and profits in its fiscal 2022 third-quarter earnings results, but overall sales and profits were still down from last year, and marijuana remains a buzzkill.

Coupled with supply shortages on glass and runaway inflation driving all costs higher, Constellation will be raising prices, which could impact sales going forward. But the alcoholic beverage distributor did raise its earnings outlook for the full year, making the quarter a mixed bag of results.

Glass, bottle, and can of Modelo Especial beer

Image source: Constellation Brands.

Beer hasn't gone flat for Constellation

Constellation Brands said net sales of $2.32 billion were 4.9% lower than last year, but they still eked out a gain over analyst consensus estimates by $40 million. 

Its beer business continued to exhibit exceptional strength in the face of lackluster industry growth, with sales rising 4% to $1.71 billion and depletions rising 8.4% from last year. Depletions are sales to distributors and retailers, and are an industry proxy for consumer demand.

The Corona and Modelo family of beers have long been trending above the industry, and IRI data indicates the segment is the top supplier in the high-end beer category and the leading dollar share gainer, adding 1.3 percentage points to its market share. Modelo Especial continues to flex its muscles in the beer market, with depletions surging 13% year-over-year while Corona Extra jumped 11% from the year-ago period. 

Even so, segment operating margins fell by 130 basis points to 41.3% as inflation ravaged the business, more than offsetting the price hikes Constellation imposed and the benefits from a shift in its marketing expenditures. As a result, the brewer will raise beer prices by 1% to 2% in the coming year.

Man choking on marijuana cigarette

Image source: Getty Images.

Cannabis still causing headaches

The same strength can't be said of its partnership with Canopy Growth (CGC 5.91%), the Canadian cannabis company Constellation invested $4 billion into in 2017 in what became a green rush among giant corporations to stake claims in the budding pot market.

Since those early days when there was so much hope for what marijuana could become, Constellation has had to continuously write down the value of the investment. In the current quarter, Canopy Growth swiped $0.31 per share from Constellation's earnings, noted it had recognized a $424 million unrealized net loss in reported basis results since the initial investment, and devalued its investment in Canopy by another $200 million.

To see what a drag this pot company is having on Constellation Brands, in its updated full-year earnings guidance Constellation estimates it will lose between $0.10 and $0.25 per share. But if you mercifully remove Canopy from the equation, it is guiding toward a profit of $10.50 to $10.65 per share.

It's also noteworthy that the elevated guidance suggests fiscal fourth-quarter earnings will be in a range of $2.06 to $2.21 per share, which is below Wall Street's consensus estimates of $2.35 per share.

Cashing in on a growing trend

Speaking of partnerships, Constellation Brands also announced it was entering into one with Coca-Cola (KO -0.67%) to produce ready-to-drink (RTD) beverages under the soda maker's Fresca brand.

Industry site IWSR expects RTD volume to double in size by 2025, growing at a 15% annual rate between 2020 and 2025 in 10 global markets. It should account for 8% of the total alcoholic beverage market by then, up from 4% two years ago.

While hard seltzer is expected to account for a large portion of the growth, a segment we know has all but rolled over and died here in the U.S., IWSR notes the beverage is largely unknown elsewhere in the world, and as recognition grows so should sales.

A stock ready to pop?

Still, the RTD space is very crowded, and Constellation is going to be spending between $5 billion and $5.5 billion on upgrading its brewery capacity in Mexico between now and fiscal 2026. That is going to constrain Constellation's ability to expand earnings, even without the drag of marijuana on its operations.

At 83 times trailing earnings, 20 times next year's estimates, and 33 times the free cash flow it produces (Constellation expects to generate between $1.4 billion and $1.5 billion this year), the alcoholic beverage producer seems an expensive stock to swallow.

Rich Duprey owns Coca-Cola. The Motley Fool owns and recommends Constellation Brands. The Motley Fool has a disclosure policy.

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