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Constellation Brands Gets a Downgrade from Susquehanna After Canopy Growth Investment

In what is the biggest investment to date in the growing legal marijuana industry, Corona beer maker Constellation Brands made a $4 billion investment this month into marijuana company Canopgy Growth Corp.

While Canopy Growth Corp. shares exploded on the news, it was a different store for Constellation Brands.

One analyst at Susquehanna has weighed in on the firm’s concerns over the investment.

Analyst Pablo Zuanic downgraded shares of the giant alcohol company from “neutral” to “negative” and lowered his price target on the stock from $199 to $171.

According to the analyst’s research note, Constellation Brands had justified its $4-billion investment in Canopy Growth by highlighting the creation of a “fourth leg,” but Zuanic thinks the company’s “three legs” are imbalanced.

The analyst made note that beer accounted for 70 percent of earnings in fiscal 2018, wine at 25 percent and spirits at 5 percent.

Zuanic wrote, “STZ is a company guiding for ~10% medium-term EPS growth, with 4.7x leverage, and what we see as significant reinvestment risk, yet it trades at an unwarranted 25% peer premium.”

He added, “We could add political risk to these issues (state of the Hispanic consumer? volatile trade negotiations with Mexico?). Examples of the reinvestment risk include the approach for $26Bn market cap May last year; a record craft beer multiple paid for Ballast; and, now the $4Bn investment in the cannabis industry, worth three years of STZ FCF. While the stock’s sector premium has narrowed to ~25% on 1yF Factset EV/EBITDA (16% on P/E, but given the high leverage we do not think P/E is the right valuation tool here), we think such a premium is not justified given the above growth and risk metrics.”

Both Constellation Brands and Canopy Growth described the investment as the biggest investment in the burgeoning marijuana industry yet.

“This is rocket fuel,” Canopy Chief Executive Officer Bruce Linton exclaimed. “We’re going to be way more global.”

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” remarked Constellation CEO Rob Sands.

RBC Capital Markets recently said that the investment is “exactly the type of move that more companies should be making.”

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