Food & Beverage

Constellation Brands stock sinks as weak wine sales, cannabis investment hurt 2019 forecast

Key Points
  • Shares of Constellation Brands drop after the company disappointed Wall Street with its fiscal 2019 outlook.
  • Its $4 billion investment in Canopy Growth, a Canadian marijuana company, and expected weakness in its wine and spirits business affected its outlook.
  • The alcohol beverage producer otherwise beat on its top and bottom lines for the third quarter.
Robert Sands, CEO, Constellation Brands
Scott Mlyn | CNBC

Shares of Constellation Brands skidded as much as 11 percent Wednesday morning as the Corona brewer tries to offset its disappointing wine and spirits business with the latest craze: cannabis.

Global alcohol consumption has been dropping as consumers find other vices — like marijuana. As a way of moving beyond its wine business, Constellation has been pushing into the cannabis industry. The company, which is the third-largest beer company in the United States, closed a $4 billion investment in the Canadian marijuana company Canopy Growth in November. It is also looking to sell some of its U.S.-based wine brands in a deal that could be worth more than $3 billion.

President and COO Bill Newlands, who will succeed Bob Sands as CEO in March, has been overseeing the wine and spirits business as the company decides on a strategy to address its disappointing performance.

"We've have been challenged by the lower end of our [wine] business, which in totality has been flat or down," Newlands told analysts on the conference call. "We continue to be slightly overweighted in that sector of the business."

Its lower end wine brands include names like Mondavi, Ravenswood and Ruffino, which sell bottles for under $11.

Bottles of Constellation Brands Inc. Wild Horse Cabernet Sauvignon wine sit on display for sale inside a BevMo Holdings LLC store in Walnut Creek, California, Jan. 3, 2018. 
David Paul Morris | Bloomberg | Getty Images

But Constellation's push into cannabis has yet to pay off. The Victor, New York-based company said that it wrote down the value of its Canopy stake by $164 million in the third quarter. It had financed the deal with debt, and the interest expenses are expected to shave 25 cents off its per-share earnings for the year, according to the company's estimates.

Constellation Brands said it expects to earn $9.20 to $9.30 per share for the fiscal 2019 year on an adjusted basis, missing analysts' expectations of $9.43 per share. Last quarter, it estimated earnings per share of $9.60 to $9.75 for the fiscal year. That outlook excluded any impact from the investment.

"While we remain bullish on [Constellation's] positioning in beer and its [long-term] opportunity especially with its investment in Canopy Growth (NYSE:CGC), we believe it is urgent that STZ address its low end wine business," Wells Fargo analyst Bonnie Herzog said in a note.

Here's what the company reported for its fiscal third quarter compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $2.37, adjusted, vs. $2.06 expected
  • Revenue: $1.97 billion vs. $1.91 billion expected

Constellation said it expects weakness in its wine and spirits business next quarter, with both sales and operating income expected to fall by low-single digits.

Wine and spirits sales were nearly flat in the latest quarter, up only 0.4 percent from the previous year. The company reported sales of $762.8 million for the division, which includes Svedka vodka.

The company's stock, which has a market value of $32.7 billion, struggled in 2018, with shares ending the year down 30 percent.

Constellation Brands product line.
Adam Jeffery | CNBC

The company otherwise beat Wall Street's expectations. The company reported fiscal third-quarter net income of $303.1 billion, or $1.56 per share. Excluding items, Constellation Brands earned $2.37 per share, beating the $2.06 per share expected by analysts surveyed by Refinitiv.

Net sales rose 9 percent from the previous year to $1.97 billion, topping expectations of $1.91 billion.

Sales for its beer business, which includes Corona and Modelo, grew to $1.21 billion, up 16 percent from the previous year's third-quarter sales of $1.04 billion. That's in part due to the Constellation's increased spending in marketing for its beers.