Macquarie Cautious On Constellation’s Cannabis Investment

Constellation Brands Inc. (NYSE: STZ) invested $4 billion in the cannabis company Canopy Growth Corp (NYSE: CGC) in August for a 38-percent stake in the company — and that move earned the beverage company a sell-side downgrade Thursday. 

The Analyst

Macquarie Research analyst Caroline Levy downgraded Constellation Brands from Outperform to Neutral and reduced the price target from $245 to $210.

The Thesis

Constellation’s beer and wine sales remain healthy within the industry, Levy said in the downgrade note. (See her track record here.) 

The addition of new products and anticipated margin improvement should drive strong results in 2019, but cannabis won’t be a factor, the analyst said. 

Improved branding will likely be necessary to reveal value in the cannabis business, Levy said. “After attending the recent 27,000-person-strong MJBiz Conference in Vegas, we believe the market for cannabis and hemp products will indeed be extremely large; the U.S. is likely to decriminalize cannabis in the not-too distant future, potentially opening up a huge market.”

Cannabis and hemp are ingredients, the analyst said, adding that Macquarie believes the products’ sustainable value is in branded products. 

” … Brand-building will be costly and unpredictable. It thus seems difficult to see any near-term profits for Canopy and possibly subpar returns for many years, if it continues to prioritize sales growth and market share.” 

In an updated outlook on Canopy Growth, Levy said she expects lower sales from disruption during the launch, as well as increased marketing costs 

In an updated outlook on Canopy Growth Corp. (NYSE: CGC), Levy forecast lower sales from disruption during the launch of the Canadian legal market, as well as increased costs tied to marketing and international expansion.

Price Action

Constellation shares were down 2.15 percent at $197.14 at the time of publication Thursday, while Canopy Growth was down 1.35 percent at $33.54. 

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