Here is a show stopper. “Constellation Brands shareholders are getting Canopy Growth almost for free….”. This is a quote from an interview with Bruce Linton CEO at Canopy. What Bruce was relating to was the $4 billion STZ paid for 37 percent of CGC last November.
In the interview, Linton comes across as a smart guy with a clear long strategy for growing CGC. But any notion of STZ obtaining Canopy for free borders on stupidity. If you doubt this point, just ask any Constellation shareholder.
Between the time the $4 billion investment in Canopy was announced last year and year-end, Constellation Brands shareholders lost $12 billion in stock price. And then there is the issue of continuing cost for years to come. STZ borrowed the funds to buy Canopy stock.
Without knowing the exact terms, let’s assume it was a 10-year note. These days the market for super high-quality corporate debt of 10 years is about 4.25 percent. This translates into annual interest payments by Constellation of $170 million. This may only amount to 7 percent of STZ net income, but it equals nearly twice the current annualized revenues of Canopy Growth.
No wonder Constellation shareholders dumped the stock. We all understand that the outlook for cannabis is special, but there is no way that Constellation is gaining anything for free.
But the ire of shareholders in dumping STZ stock may offer an investment opportunity. So let’s take a quick look at some key data points. On its own, the company is forecast over the next five years to grow 8.58 percent. This is the average expectation of the 20 Wall Street analyst following the company. Keep in mind that the entire U.S. economy is growing at less than one-half this rate.
Over the near term, revenues should come in around $8 billion this year, while Wall Street expects earnings per share to hit $9.50, a 9 percent gain. That is a multiple of 18 times in a stock market selling at 23 times.
So STZ is projected to grow more than twice the rate of the economy and is valued at 20 percent below the average S&P 500 stock. Now let’s look at the dividend.
Bruce Linton on BNN Bloomberg
A yield just under 2 percent
Even with the added debt burden, the company’s annual dividend of $2.96 is safe and will likely grow at a rate equal to earnings growth. This represents a yield of just under 2 percent. That won’t impress everyone, but it is about equal to the average for an S&P 500 company.
Traditional investors have gravitated toward STZ for its stable and predictable earnings and cash flow. That is possible because they have some of the best consumer brands in the beer, wine, and spirits business. The list of names like Modelo, Robert Mondavi, and SVEDKA Vodka is just the tip of the iceberg.
Until recently, shareholders have been well treated. Over the past five years, STZ shares have appreciated about 120 percent compared to 46 percent for the S&P 500. By any risk measure, that is a smoking hot performance. But things are changing.
It is well documented how consumer tastes are changing with younger consumers turning away from distilled spirits in favor of beer and cannabis. This is the whole point of the Constellation-Canopy deal.
Wall Street has interpreted the deal as a definitive sign that the alcoholic beverage business is in some sort of a death spiral and the price STZ is paying for entry into the cannabis is a sign that management agrees.
The question remains… where’s the payoff?
So where is the payoff? Even if you assume STZ growth continues at the 8+percent rate and the CGC revenues reach $1 billion within three years (only slightly ridiculous), cannabis will still represent less than 10 percent of combined revenues and a far smaller share of earnings.
So owning STZ to participate directly in the cannabis industry is a pretty weak argument. The notion that Constellation could infuse some of its many beverage brands is much more likely but with changes in U.S. Federal Law still some time away, that is no justification for investing
$4 billion in a cannabis company.
Nevertheless, in the investment world, good value can be present just about anywhere. And in a market for cannabis stocks that has moved upward at a blistering 44 percent pace last month, investors may want to take a closer look at an underperformer like STZ. Consider it the antithesis of a cannabis investment; it could be a scheme to get rich slowly.