Constellation Brands, Inc.'s (STZ) first quarter after its billion-dollar cannonball into cannabis is taking its shares higher.
Shares of the Victor, N.Y.-based beer, wine, and spirits distributor jumped after besting analyst expectations on its second quarter earnings, closing the day up 5.4% to $222.10 per share.
The company posted a beat on top and bottom lines for earnings, reporting revenue of $2.30 billion and $2.87 in earnings per share. Earnings per share significantly outpaced analyst estimates of $2.60 per share, according to Thomson Reuters.
The result supports the estimates of bullish market sentiment heading into the release, as five analysts publishing research this week had issued buy ratings in anticipation of earnings, according to FactSet data.
"The double-digit EPS growth we delivered in the second quarter is top-tier for consumer product companies," Constellation's CEO Rob Sands said in a statement. "Constellation remains the high-end leader and the most significant growth contributor in the U.S. beer market, and we're seeing strong growth trends for the super-premium plus segment of our wine portfolio."
He noted that Corona was the most significant brand contribution to earnings.
The company's profitable wine segment, which generated $671 million in net sales for the quarter ended August, include brand names like Robert Mondavi, Clos du Bois, Kim Crawford, Meiomi, Mark West, Black Box, Ruffino and The Prisoner.
Additionally, the company's core brands -- Corona and the new "Corona Premier" -- are helping the company slate continued growth.
"The beer business was the number one share gainer in the U.S. beer industry driven by accelerating Corona brand family dollar trends and Modelo Especial's position as the number one growth brand in the market," the company said in a statement.
Margin Moves Shares
Constellation cited record margin in the beer category as a significant tailwind, helping bolster the share price.
"The beer business achieved record operating margin of 41.3%, an increase of 10 basis points, as benefits from favorable pricing and operational performance," the company reported.
The significant margin improvement is a major boon, as other beverage companies have reported that transportation and aluminum prices had impacted earnings negatively. While Constellation acknowledged these impacts, it explained that its higher margins on its products were able to overcome these challenges.
The company even managed to outpace its Tony Romo-headlined advertising spend, which it noted as another impact on margins.
Cannabis Foray Helps Surge
The company made a big splash into cannabis in August, spending about $4 billion for a stake in Canadian cannabis leader Canopy Growth Corporation (CGC) .
"Our investment in Canopy Growth provides us with a strong foothold in the emerging global cannabis market, which could be one of the most significant growth opportunities of the next decade."
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.
Canopy has certainly enjoyed the increased partnership so far, surging from roughly $25 per share to nearly $50 today, the firm's stock marks a handsome return for Constellation on their bold investment.
TheStreet founder and Action Alerts Portfolio manager Jim Cramer will be sitting down with Canopy Growth Corporation CEO Bruce Linton and Constellation Brands COO and President Bill Newlands on October 13 at Jim Cramer's Boot Camp for Investors.
The positive results should be a happy subject for discussion for the trio come next Saturday.
To be sure, the cannabis companionship does not come without its hang-ups.
For one, some think Canopy has risen too far, too fast.
Morgan Stanley analyst Dara Mohsenian palces the fair value for Canopy stock at $25 per share, about one half of today's price, for example. A drop back to those levels for Canopy would take a great deal of shine off of Canopy's luster for Constellation.
This is due in part to the large amount of capital the company was required to shell out for the cannabis king.
Brian Nelson, President of Investment Research at Valuentum, an Illinois-based investment research firm, is remaining cautious on the cannabis catalyst as well, especially given Constellation's debt load.
"Constellation's Canopy deal will add another $4 billion in debt to a balance sheet that already has a long-term debt load of nearly $10 billion as of August 2018," he said. "The company will have to continue to generate copious amounts of free cash flow and perhaps slow buybacks to deleverage in the future, in our view."
He added that there are a number of variables in the cannabis space that have to be sorted out.
"Sizing up the long-term cannabis opportunity given policy risks and then shaking out who will have the corresponding market share across verticals will be an inexact science so early in the adoption curve, particularly as many of the smaller companies may be money-losing endeavors," he explained.
Shareholders also told Real Money that the brand-new status of the cannabis industry makes it hard to accurately factor in for Constellation.
"It's such a nascent area that its really hard to model," Ian Browning, portfolio manager at Peddock Capital Advisors, a Braintree, Massachusetts-based advisory firm told Real Money.
His firm oversees a total of $200 million in its equity accounts, which includes 20,679 shares of Constellation Brands.
"Obviously making such a big bet on Canopy Growth is something we've been watching on the risks," he explained. "It could be a compelling investment, but it's just hard to model the impact right now."
To be sure, the cannabis question marks are not scaring him or his firm off of the stock.
"I still really like the stock [Constellation]," he said. "This is a really outsized position for us already, so we're not adding to it, but we're also definitely not reducing it."
Trader's Await Tolerable Entry Targets
On the back of some remaining concerns, 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 former 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 once the "euphoric response" wears off.