Constellation Brands, Inc.'s (STZ) $4 billion-dollar investment in Canadian medical marijuana leader Canopy Growth (CGC) shot up Canopy's stock price, but not everyone was happy with the outlook for Constellation.
Canopy jumped over 30% on Wednesday, Constellation Brands fell 6% as some analysts raised concerns over the massive, speculative bet on an emerging industry.
"I cut my estimates pretty substantially," Tim Ramey, equity analyst at Pivotal Research equity told Real Money, specifying a reduction in price target from $285 to $265, but maintaining a buy rating."This is effectively a venture investment, so you're going to have the traditional Constellation Brands and this venture piece," he said. "It could be a moonshot or not."
Ramey added that other estimates for the company would need to be reduced as well.
"Estimate interest expense will rise about $40 million per quarter and the company will not be buying back shares or doing other acquisitions until the debt returns to 3.5x EBITDA," he wrote in a note provided to RealMoney. "In the short-term, this is quite a big negative."
SunTrust analyst Will Chappell also raised questions about the transaction and how it helps Constellation shareholders.
"We are just not certain what the incremental $4 billion investment brings to Constellation," he wrote. "We remain bullish about STZ's core business, which is the basis of our Buy rating, but we expect questions about this investment to linger."
Chappell held that his firm is apprehensive about the amount of attention that will be paid to a minority-interest company as a result of the deal as well.
Others raised questions about the terms of the deal and whether Constellation has overpaid.
"Constellation just paid a hefty premium as most people are awaiting a major market correction for Canadian cannabis stocks," says Micah Tapman, managing director of Canopy Ventures, a Colorado-based venture capital firm and business accelerator for the cannabis industry, unaffiliated with Canopy Growth Corp. "It is easy to see Constellation's move as foolish."
Canopy Ventures has about $18 million under management in early-stage cannabis companies.
Tapman added that the high price could've been driven by pressure on the alcohol industry.
"I think Constellation had a tremendous fear of missing out: we've all seen the data about the alcohol industry and the challenges they've seen," he noted. "Cannabis is a product that is going to cannibalize the alcohol market, and they (the alcohol companies) all see they have to move into this business."
However, other analysts were far more bullish, reacting to the pullback as a sign of the market remaining behind the public.
These analysts' views reflect remaining apprehension over legalization and regulation of a new market and how long it will take for it to get going.
"I think it's irrefutable that the cannabis market will be a huge market in the next 15 years," Ramey said, noting his concerns are largely shorter-term. "The venture could be a reason to raise your price target, I'm just not doing it."
- Martin Cassidy contributed reporting to the story.