Constellation Brands (STZ) is still a best in class sin stock for investors eyeing cannabis and beer.
Shares of the Victorville, New York-based alcohol and cannabis company fell about 1% shortly after Friday's open as the stock ran into overbought territory on technical indicators and was hit with a downgrade from Deutsche Bank.
"In short, the story (in our view) has been successfully 'refreshed' after months of confusion over wine dilution/Canopy impacts, and lingering concerns over potential beer fundamental erosion," Deutsche Bank analyst Steve Powers said. "However, as a result, we see far more balanced risk/reward from here."
As such, he downgraded his rating from "Buy" to "Hold" as much of his upside case has now been realized.
Yet, that isn't shaking the majority sentiment on the Street that is standing by the bull case after the company's earnings beat for the February-ended quarter.
"The pull-back in STZ shares over the past several months has created an attractive buying opportunity for investors willing to look beyond near-term dilution from its Canopy Growth (CGC) investment," BMO Capital Markets analyst Drew Levine said, picking up on similar points to those seen by Powers. "With the impending low-end wine brands' divestiture, STZ is poised to return to double digit "core" earnings growth; yet, it's trading at a multiyear low valuation."
He maintained his "Buy" rating and set his price target at a lofty $225 per share.
The removal of the low-cost wine overhang and the contrasting strong results from premium beer sales in Mexico is motivating the majority of analysts following the stock to stand by the bull thesis for the stock amidst the down day.
"I'm confident that this optimized portfolio of wine and spirits brands will enable us to consistently deliver growth, exceeding the trends of the U.S. wine market, while migrating to an operating margin profile of 30%, a significant improvement from the 26% margin achieved for this business in fiscal 2019," CEO Bill Newlands explained in an earnings call Thursday evening.
He noted that the company is currently dominating the U.S. high-end beer segment as well, driving 40% of the growth observed in the category for domestics and 100% of growth in imports over the past year.
That action motivated Goldman Sachs analyst Judy Hong to favor the name as a top pick over the beleaguered Boston Beer Company (SAM) , which she downgraded to "Sell".
"While SAM has seen its overall sales growth accelerate on the back of it flavored malt beverage (FMB) and cider innovations in 2018, we downgrade SAM to Sell and see headwinds in 2019 as competition intensifies and the company is unlikely to repeat its innovation success again this year," she explained. "We favor STZ within our Alcoholic Beverage coverage as its core beer portfolio remains on a solid footing and there is potential upside to sales if its FMB innovations (i.e. Corona Refresca) proves to be more successful."
All of this is not to mention the still unrealized value present in Canopy Growth (CGC) , a leader in the Canadian cannabis market that the company could well own in just a few years. The price that Constellation paid is also at a steep discount at this point after a near 50% run in CGC stock this year.
Newlands noted that the company could reach $1 billion from its big bet on cannabis by the end of the fiscal year.
Overall, there might just be too much upside to the businesses Constellation is shrewdly shooting for. There is certainly too much to ignore for the majority of analysts.
"We remain 'Overweight' the stock here with still solid ~20% base case upside underpinned by our bullish beer business revenue growth outlook," Morgan Stanley analyst Dara Mohsenian said, calling STZ an "underappreciated growth story at a bargain price."
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