Macquarie Remains Cautious On Constellation Ahead Of Cannabis-Related Losses

Some on the Street saw wisdom in Constellation Brands, Inc. STZ's cannabis play. But on Wednesday, when management guided for a 10-cent quarterly earnings hit from its Canopy Growth Corp. CGC investment, investors second-guessed the strategy.

The Rating

Macquarie Research analyst Caroline Levy maintained a Neutral rating on Constellation Brands with a $162 price target.

The Thesis

The Canopy guidance wasn’t totally out of left field.

“STZ acknowledged, as we had expected, that Canopy will become more dilutive in FY20 than FY19, not just from carrying a full year of interest expense, but also due to investment to capture market opportunities in cannabis,” Levy wrote in a note, saying the loss could be offset by better beer shipments.

The analyst expects Canopy equity losses for the next three years.

“Moreover, estimates will likely come down further if a wine sale is secured (though pruning is positive for future sales growth and margins),” she wrote.

The Cannabis Capital Conference is coming back to Toronto April 17-18!

Management guided for flat beer margins in 2021 against Macquarie’s forecast for a 75-basis point expansion. Levy had previously expected volume growth and pricing to offset cost inflation.

“While beer sales remain strong, we worry the cost of this growth is increasing given guidance for no operating leverage despite newly added capacity,” she wrote in a note.

Price Action

At time of publication, Constellation shares traded up marginally at $167.20. Shares closed the previous trading session down nearly 5 percent.

Related Links:

Constellation Brands Beats Q3 Earnings Estimates, But Stock Sinks On Canopy Growth-Related Guidance Cut

Analyst: Constellation Worth Buying Despite Political, ESG Risks