The marketplace is passing judgement on Constellation Brands (STZ) on Thursday. The firm went to the tape early this morning with their third-quarter results. At first glance, to the untrained eye, the results look okay. A beat of 31 cents on EPS, or is it a miss of 52 cents? Hmm. Sure would prefer to go with the non-GAAP number. Revenue looks good. Right? The print of $1.97 billion beat expectations by a rough $60 million, and showed year over year growth of 9.4%. Better stick with the yearly view. That's because sequentially, (q/q), that growth is negative... top to the tune of -14.3%. In fact, the $1.97 billion number is the lowest sales result for this name in the past three quarters.
Shares closed Wednesday down 12.45% at $150.88.
You will not have to kick over too many rocks to fins the root of the issues here. Enough of the ugliness stems (get it?) from the investment that the firm made last year in Canopy Growth (CGC). This morning, Constellation knocked the "unrealized gain" that the firm had mentioned in their October earnings call from $1.3 billion down a notch to $1.2 billion. Canadian cannabis producers have hit issues in making progress, including not just shortages, but the fact that the U.S. market remains off limits at the federal level.
The stance of the federal government in the United States does not just impact recreational users, or those seeking medical relief, but the market for cannabidiol (CBD) as well. Though CBD packs none of the psychoactive punch of THC, CBD remains illegal to introduce into food stuff, to market, or to sell across state lines. All of the above would be the likely reason for an alcoholic beverage producer to get involved in the first place.
There is also the note offered by Cowen recently, stating that 2018 might have been the worst year for beer in terms of sales in recent memory. However for Constellation, brewers of Modelo, Corona, and Familiar, beer sales increased 16%, but operating margins decreased even in that space to a still quite healthy looking 37.3%. The problem is primarily for now... the cannabis play. Oh and forward guidance. Yeah, that may leave a mark.
The firm now looks for full-year earnings per share to land in a range spanning from $9.20 to $9.30. This is down from the firm's own prior guidance of $9.60 to $9.75, and below the less optimistic consensus view that had been in place at $9.43. Free Cash Flow still looks solid, Current Ratios are fine. I don't love the firm's debt levels versus cash, but they seem healthy versus total assets.
The shares do come with an annual dividend of $2.96. That is attractive to longer term investors that shave nearly $3 off of net basis per annum even if the investor does nothing on his or her own, but watch TV. The interesting thing about this morning's low is that the shares were caught by the Pitchfork's center trend line. Does that mean it holds? It could.
As an investor, I am not in love with the brewers, nor am I as enamored with Canadian cannabis as I once was. If I were inclined to bite here, as some of you might be, I would enter small if I could not wait out the rest of the week just to get a feel for where the name needs to trade. April $150 puts will pay approximately $5.20 in mid-Wednesday trade for anyone thinking of going that route.