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It’s Just a Matter of Time Before Canopy Growth’s Woes Hit Constellation

Dana Blankenhorn

Canopy Growth (NYSE:CGC) failed to meet lowered earnings estimates but its problems have yet to hit its biggest owner. Constellation Brands (NYSE:STZ) bought 38% of the Canada-based marijuana company last year. It has warrants for CGC stock that would give it majority control.

It's Just a Matter of Time Before Canopy Growth's Woes Hit Constellation

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But while Canopy shares are down by 25% from the $34.20 level they held the day before earnings were announced, Constellation shares have barely budged. They’re down just $1 or about 0.5% over the last two trading sessions.

Canopy looked on the bright side of life when it reported August 14. Its sales of dried cannabis rose 94% year over year was the headline. But on his conference call CEO Mark Zekulin confirmed he’s leaving Canopy once a replacement is found. That should happen in the next few months.

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Constellation Doubles Down

Zekulin and his predecessor, Bruce Linton, invested heavily ahead of marijuana legalization, which has been moving slowly. They have also filed 56 patent applications, bought brands that can’t be advertised, and sought international growth that doesn’t exist.

It was this optimism, and investment, that led Constellation to buy its first stake then double-down to its present 38% holding. It also bought those warrants that will, once exercised, give it majority control. Constellation’s confidence helped fuel Canopy’s rise.

But the value of those warrants has been hit by the fall of Canopy shares. Constellation has gotten a delay in the exercise date, to up to eight years. This comes as Canopy has a deal buy Acreage Holdings (OTCMKTS:ACRGF) once the U.S. legalizes marijuana.

Constellation, in other words, is tripling down on legal pot. Meanwhile, former CEO Linton, unceremoniously booted out last month as Canopy’s co-CEO and board chair, told BNN Bloomberg he was a buyer of CGC stock after the shares fell on Aug. 15.

Until legalization, Constellation is sitting on warrants it can’t exercise, an investment it can’t get value from, and growth it can’t access. Despite this, Constellation shares are up 21%, more than the general market in 2019. It’s helped by continuing strong sales of Mexican beer brands like Corona and Modelo, and liquor brands like Svedka. Constellation is also selling 30 low-cost wine brands to E.J. Gallo for $1.7 billion, a little more than its original $3 billion asking price.

The result is a company that’s leveraged toward high-end brands of beer, wine and spirits, anticipating a windfall when its marijuana train comes in. Almost two-thirds of the analysts following Constellation rate it a buy.

Risk? What Risk?

Constellation stock is helped by first-quarter earnings that beat estimates. It earned $2.21 per share, when only $2.07 was expected.

Even better numbers are anticipated for the current quarter, to be reported Sept. 27. Constellation is expected to deliver $2.63 per share of earnings on revenue of $2.3 billion.


Canopy, meanwhile, is expected to see a loss of 26 cents per share when it reports next in November. Canopy’s recent quarter sales of $90.5 million are just a blip on Constellation’s $2.1 billion revenue figute last quarter.

“If you look at the speed of growth and the complexity of market regulations, the key is finding the right experience and the right person, and I think there are a number of sector backgrounds that could work well,” Zekulin told BNN Bloomberg.

Constellation is certain to have a hand in choosing Zekulin’s successor. Whomever it is, they are expected to bring stability to the company, as our Will Ashworth has written.

So far, however, only superstars at companies like Nike (NYSE:NKE), Williams-Sonoma (NYSE:WSM) and Starbucks (NASDAQ:SBUX) are in the rumor mill. It’s like a mid-major college football team that’s only considering big-time head coaches for its program. Nick Saban is not walking through that door, and whoever does walk in is bound to be a disappointment.

Bottom Line on Canopy Growth Stock

While the problems at Canopy Growth have yet to impact Constellation stock, I think it’s only a matter of time before they do.

While generations of Americans may be happy not to see their friends hauled off to jail for smoking weed, it takes time to build a scaled, legal marketplace. Canopy underestimated that time. So has Constellation Brands.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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