Constellation Brands, the parent company behind Corona beer, said they’re already making a huge profit off their investment in the Canadian marijuana market — and the country’s recreational cannabis shops don’t open for months.
Last fall, Constellation Brands, whose portfolio also includes Svedka vodka and Modelo beer, announced they’d invested $190 million in the Canadian cannabis giant Canopy Growth Corporation, netting them 10 percent of the company. Now, nine months later, Bloomberg reported that Constellation announced during its first-quarter earnings report the investment had already realized a gain of more than $700 million.
“Our investment in Canopy is certainly paying off,” Constellation’s Robert Sands said Friday on a conference call with Bloomberg.
Sands went on to say the company would invest in the U.S. cannabis market if it were legal to do so, but would never risk the wrath of federal regulators.
This growth that Constellation has earned comes despite the fact that Canopy Growth recently missed some estimates that investors — excited about Canada’s recent push towards adult-use legalization — had projected. Consequently, Canopy’s stock dropped by 10 percent.
However, the financial analysts at Trefis Team, led by MIT engineers and Wall Street analysts, say the market is overreacting and Canopy’s stock will soon rise again.
“We figure that this is a market over-reaction to the earnings miss and believe that the stock has a huge upside potential with the opening up of the recreational marijuana market in third quarter of fiscal 2019,” the Trefis Team noted in Forbes on Monday.
At the time of closing bell on Monday, Canopy was trading at $40.64 Canadian dollars in Toronto. Trefis, however, expect Canopy’s stock to rise to $53 Canadian dollars by October, when Canada is slated to open its recreational cannabis market.
Charlie Alovisetti, a senior associate and chair of the corporate department at Vicente Sederberg LLC in Denver broke down the meaning of Constellation Brands’ assertion that they’d earned $700 million from their cannabis investment.
“They haven’t really realized a gain of $700 million because they haven’t sold it,” Alovisetti told Cannabis Now. “If they exited, they would realize a $700 million gain, but it’s just a paper gain for the moment. I think it’s a little bit sensational. If Constellation sold any of their stake, at once it would have a downward pressure on the stock price.”
Alovisetti said that Constellation’s earnings, however, do reflect the general enthusiasm levels of investors in the Canadian cannabis space.
“It’s nuts, the Canadian markets are on fire,” said Alovisetti. “Everyone we talk to is either trying to list on the Canadian Stock Exchange — and these are U.S.-based companies — or thinking about listing. There is definitely a ton of interest. I think a lot of it is driven by the fact you don’t really see fast-growing industries in Canada.”
Alovisetti also explained it’s harder to see the kind of growth we’re now seeing in cannabis in Canada’s more embedded industries like oil and gas. He closed on the realities for companies like Constellation that want to get involved in the market.
“If you’re an alcohol company that wants to enter the industry, your options are pretty limited. You can’t do a deal in California, and then there are only a few big players in Canada,” said Alovisetti. “Institutional money being filtered into a limited set of options.”
Longtime industry expert Kris Krane of 4Front Advisors pointed to Canada’s federal government when asked about Constellation’s big earnings report.
“This is the benefit of being federally legal,” Krane told Cannabis Now. “We just don’t have that luxury in the U.S. Everyone is betting on Canopy and these bigger Canadian companies being the globally dominate players and I understand why. Because they can operate all over the world and U.S. companies can’t.”
Krane pointed out other realities for U.S. producers that may give investors pause before they make the jump.
“We basically have to rebuild our infrastructure to go from state to state, we can’t build the economy to scale in any one place,” said Krane. “Things are so much more expensive and so much more challenging for companies in the U.S. It’s all due to federal prohibition.”
But this doesn’t mean thirsty Canadian pot investors are going to miss out on opportunities stateside.
“The Canadian public market is really bullish on cannabis companies right now, both Canadian and American. But the Canadian companies get a huge boost for not being in violation of federal law,” said Krane.
We asked the ArcView Group’s Director of Business Development John Downs if Canopy Growth was the hottest stock U.S. investors could pick up north of the border.
“I think it’s important investors want to look not in the rearview mirror but ahead. It’s important to realize just because those large gains for Constellation Brands and Corona are there, it doesn’t mean we’re going to see another huge gain.”
Downs believes the input of capital into the industry will hit even harder as the war on cannabis comes to an end.
“I think as we continue to see signs that prohibition is ending, you’re going to see an acceleration of capital into U.S. assets as people try to recreate the rise in prices we’ve seen in Canada,” said Downs. “I think we’ve seen a huge run-up on the back of federal policy in Canada, and I thinks it’s reasonable to believe we will see the same thing here in the U.S.”
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