Why Canopy Growth Is Pulling Down Constellation Brands’ Earnings

By Chris Lange Updated Jan 30, 3:06PM EST · Published Oct 3, 10:30AM EDT

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Why Canopy Growth Is Pulling Down Constellation Brands’ Earnings — © NoDerog / Getty Images

Constellation Brands Inc. (NYSE: STZ | STZ Price Prediction) reported its fiscal second-quarter financial results before the markets opened on Thursday. Although earnings were in line with expectations, guidance tied to Canopy Growth Corp. (NYSE: CGC) really weighed down the stock.

The beverage giant said that it had $2.72 in earnings per share (EPS) and $2.34 billion in revenue, which compares with consensus estimates of $2.60 in EPS and revenue of $2.34 billion. In the same period of last year, the company said it had EPS of $2.87 and $2.3 billion in revenue.

Beer Business posted 6.2% depletion growth, driven by Modelo Especial, which generated the most growth for the entire U.S. beer category and depletion growth of 15%. When adjusted for one less selling day in the quarter, the beer business generated 7.5% depletion growth. The beer business reported revenues of $1.64 billion, with an operating income of $685.3 million.

Separately, the wine and spirits business reported $703.6 million in revenue and $160.4 million in operating income.

Looking ahead, the firm updated its guidance for the fiscal 2019 and 2020 years. Constellation Brands now expects to see EPS in the range of $9.00 to $9.20 for 2019, up from the previous range of $8.65 to $8.95, but it cut its fiscal 2020 EPS to a range of $0.55 to $0.75 from $4.95 to $5.25. Consensus estimates are calling for $8.43 in EPS for fiscal 2019 and $9.45 in EPS for fiscal 2020.

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The big change in this guidance is tied to Constellation Brands’ investment in Canopy Growth. Constellation has invested over $4 billion in Canopy, banking on the proposed legalization of recreational weed in several countries. However, Canopy has been reporting losses and said in August that it would need another three to five years to turn profitable.

Bill Newlands, president and CEO of Constellation Brands, commented:

The winning streak for our beer business continues with Modelo Especial generating the most growth in the entire U.S. beer category, while Corona remains the #1 high-end beer brand family. This powerful combination gives us confidence in high single digit beer growth for years to come. Our Wine & Spirits innovation pipeline is primed to launch impactful product introductions, as we head into the key selling season this fall.

Shares of Constellation Brands traded down about 7% at $192.87 Thursday morning, in a 52-week range of $150.37 to $228.91. The consensus price target is $228.76.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.