Constellation Brands Inc. (STZ) could be serving up a buying opportunity after a big stumble on Wednesday.
Shares of the beer and wine giant were up around 2.5% in trading before Thursday's opening bell after they were hammered and fell 12.5% on Wednesday. The decline was precipitated by poor guidance due in part to weak low-cost wine sales, the impact of its $4 billion investment in cannabis company Canopy Growth (CGC) , and the effect of transportation and freight costs on margins.
"We've have been challenged by the lower end of our [wine] business, which in totality has been flat or down," Constellation president William Newlands told analysts on the company's third-quarter earnings call. "We continue to be slightly overweighted in that sector of the business."
Nonetheless, outgoing CEO Rob Sands argued that the company has worked diligently to deal with its challenges, declaring the stock was oversold and remains a tremendous value for investors looking to get in on the cheap
"The stock is an absolutely fantastic value," Sands said on "Mad Money" with Jim Cramer on Wednesday. "In fact, my brother and I acquired 1 million shares in the past week or so, actually 1.1."
The value opportunity and big buying opportunity was one also noted by Cramer, who commented that the stock is "intriguing" following the violent market reaction to the liquor leader's earnings call.
"It is not just another liquids company. It's got the bases covered," Cramer said in a Real Money column on Wednesday. "My view is that the stock isn't finished, it's just a lot cheaper -- and more intriguing -- than it was [Tuesday]."
Despite various analysts cutting price targets for Constellation amid the anticipated weakness ahead, many advised patience for investors looking for a discounted drink company.
"We believe patience will pay off for medium- to long-term investors, as STZ has one of the strongest (if not the strongest) portfolios among publicly traded beer companies that we believe will continue to deliver outsized growth for years to come," J.P. Morgan analyst Andrea Teixera wrote on Wednesday. "As such, we remain positive on a 12-month horizon as we believe the risk/return at these levels (P/E 12-month forward of 15.9x using our lowered estimates against alcohol peers at ~21x) is skewed to the upside and [Wednesday's] selloff represents a buying opportunity."
The company's valuation looks even more attractive based upon investors' ability to tap into the cannabis industry essentially free, something that could end up being a long-term growth driver and key to avoiding alcohol-sale cannibalization.
Meanwhile, Canopy Growth's stock surged more than 13% on Wednesday, making the drop in Constellation shares even more attractive given its possible takeover of the company.
"To better frame valuation, if one assumes zero value for Canopy, one can buy STZ's core business (ex Canopy equity income) at ~16x FY20e EPS, which is attractive for an asset we believe can compound EPS at > 10% on an underlying basis," Morgan Stanley analyst Dara Mohsenian said.
To be sure, there is a debt overhang Constellation from its blockbuster deal, but if the transaction is accretive by 2021 as Sands expects, the added value of Canopy Growth would be gravy for investors.