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Constellation Shares Tumble as Cannabis Investment Hinders Q2 Earnings

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Constellation Brands (STZ - Free Report) released Q2 earnings before the opening bell, and shares fell in the aftermath; STZ is down more than 5% in intraday trading, bringing their year-to-date return to 21.8%. The company made a substantial investment in cannabis producer Canopy Growth (CGC - Free Report) back in November of 2018, and its losses on the investment curbed their Q2 results. Let’s take a closer look at their second quarter performance and what we can expect from Constellation Brands in the near future.

Q2 Performance

Founded in 1945 and headquartered in Victor, NY, Constellation Brands produces and markets beer, wine, and spirits. It is the third-largest beer company and a leading, high-end wine company in the United States. It has a strong portfolio of high-quality brands, including Corona, Modelo Especial, Robert Mondavi, Kim Crawford, Meiomi, and SVEDKA Vodka. The company conducts its operations in the United States, Mexico, Canada, Italy, and New Zealand.

As previously mentioned, the company decided to dabble in the cannabis business when it made a $3.75 billion investment in Canopy Growth, giving it a 38% stake in the company. CGC shares are down 16.7% in 2019 thus far due to its relatively flat marijuana sales. Canopy Growth seems to be bleeding money at the moment and the firing of its co-CEO, Bruce Linton, puts the company in an even deeper hole with no legitimate general to lead them out of the slump. Canopy was definitely a looming cloud over Constellation’s Q2 report but there were some solid results in other areas of the business.

Constellation’s Beer Business posted 6.2% depletion growth driven by its Modelo Especial beer. Corona Refresca became a top 5 US high-end beer in gaining market share thanks to accelerating depletion growth throughout the summer months. Its Pacifico beer showed continued strength with double digit depletion growth.

Its beer sales were strong in the second quarter, jumping 7% from the prior year quarter to $1.64 billion. Its Wine and Spirits segment didn’t do as well; the category fell 9% from a year ago to $611.1 million. Overall, Constellation reported $2.34 billion in sales; which was on par with our estimate and gained 1.95% year-over-year. The firm also reported earnings of $2.72 per share that beat our estimate by 4.21%.

Q3 and Beyond Outlook

For the full year, the company reaffirmed its beer sales expectations to rise 7% to 9% in fiscal 2020, and softened its outlook for wine and spirits sales; these segments are set to decline between 15% and 20% from between 20% and 25%. Excluding results from Canopy, the company boosted its adjusted earnings guidance to between $9 a share and $9.20 a share from between $8.65 and $8.95 a share.

Our Q3 consensus estimates project earnings to fall 14.77% to $2.02 per share while sales should see a 3.41% decline to $1.91 billion. Beer sales are expected to increase 7.35% to $1.3 billion and wine and spirits are anticipated to generate $635 million in sales for a decline of 16.75%. Fiscal 2020 estimates forecast earnings to slip 10.24% to $8.33 per share and for sales to decline 0.87% to $8.05 billion.

Constellation’s robust beer sales continue to pad some of the company’s losses in its Canopy investment, but the losses have proven large enough to weigh on the firm’s bottom line. However, Constellation controls Canopy’s board and can leverage their position to implement the changes that can potentially help turn the cannabis company around.

Canopy is a large problem by itself and may need to undergo some drastic restructuring measures before it can cash in on all the potential growth that investors once thought it could garner. Both Constellation Brands and Canopy Growth sit at a Zacks Rank #3 (Hold).

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