Analysts are saying that Constellation Brands, Inc.'s (STZ) will continue to be a star after outshining earnings estimates today.
Shares are rising 4.3% as of 12:16 p.m. in New York, buoying the stock back to levels not seen since the August announcement of its $4 billion investment in Canopy Growth Corporation (CGC) . The firm posted second quarter EPS of $2.87, versus an estimate of $2.60, and revenue of $2.3 billion, versus an estimate of $2.25 billion.
"Beer momentum continued despite bear sentiment into quarter: buy opportunity," J.P. Morgan analyst Andrea Teixeira wrote in a note this morning. She issued a $250 price target, charting significant premium still available for investors, even after this morning's run.
Constellation's CEO Rob Sands built on Teixeira's take on the beer market in an earnings presentation Thursday morning.
"The beer business is firing on all cylinders," he said. "Results were largely driven by the beer business, which had exceptional results."
He added that exceptional results in the segment came despite a lower-than-expected spend on advertising, which contributed to record margin in the quarter.
Jefferies Financial Group Inc (JEF) analyst Kevin Grundy added to the praise, noting that Constellation is his research team's "top large cap growth idea."
"Strong results should continue given STZ's leadership position in high-growth Mexican imports, further runway for margin expansion, unique leverage to the cannabis market, and attractive valuation," he wrote in a note outlining his bullish thesis, setting a higher target of $283 per share.
It's a figure that could potentially climb further, after the $4 billion acquisition of a 35% stake in Canopy Growth Corporation closes this month. As RBC Capital Markets analyst Nik Modi sees it, Constellation shares could hit $314 after that deal is signed, providing around 30% upside for investors who initiate positions even amid today's gains.
Canopy and Cannabis Dominate Conversation
The inroads into cannabis were highlighted extensively on the earnings presentation this morning.
As cannabis remains illegal in the U.S., where Constellation has most of its distribution channels, Sands raised the possibility of cannabidiol (CBD) imports from Canopy by virtue of the new Farm Bill working its way through congress.
The bill would open up legalization of CBD, the naturally occurring cannabinoid constituent of cannabis, for the United States and therefore offer an attractive avenue to U.S. consumers.
"[CBD] has a lot of potential," Sands said. He declined to speculate on the market size, but commented that if companies like The Coca Cola Co. (KO) are looking into it, he surmises it is certainly not a small market.
When analysts questioned whether this would figure into Canopy or Constellation's revenue stream, Sands responded by explaining that it could be reflected in both.
"Canopy is one of the largest CBD producers in the world. Depending on whether or not imports are restricted [by the new legislation], the CBD could very well come from Canopy," he said, adding that Constellation would use its existing distribution channels to facilitate sales and add to the synergy between the partners.
Traders were more comfortable tempering their expectations and targeting more tolerable entry points amid today's rapid rise.
"The firm is executing the core business extremely well, and obviously has a somewhat visionary take on the future," Real Money contributor and long time NYSE trader Stephen Guilfoyle wrote in his column this morning. "I have no problem blessing an investment in this name (but not at these prices) with the appropriate steps taken toward risk management."
He suggested instead that traders wait until the stock cools off a bit, with $212 per share being a much more attractive entry point.
Real Money contributor James "Rev Shark" DePorre added that buyers on overall market weakness could be emboldened by today's report from Constellation.
"The poor market action Thursday is probably hurting the price action of STZ but this report should help to create a supply of buyers waiting to enter on weakness," he wrote.
One thing that is for sure, though, is that both traders and analysts feel Constellation still has room to shine.