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Corona brewer still bullish on Canadian cannabis after Canopy investment weighs on profits again

  • Constellation Brands on Wednesday reported a $71.1 million loss on its investment in Canopy Growth.

  • Constellation CEO Bill Newlands said that the company is still “bullish” on the Canadian cannabis market.

  • The Corona brewer invested $4 billion in Canopy in October 2017 as U.S. consumption of beer declined.

Constellation Brands is playing the long game when it comes to its investment in Canopy Growth despite the cannabis company’s continued burden on its profits.

Constellation on Wednesday reported fiscal third-quarter net income of $366.5 million, dragged down by $71.1 million loss on its investment in Canada-based Canopy Growth. The alcoholic beverage company has reported a loss on its stake in Canopy in all three quarters of its fiscal 2020.

“We remain bullish on the Canadian cannabis market as the conversion of the illicit market to the legal market continues to strengthen,” CEO Bill Newlands told analysts on the conference call.

Shares of Constellation, which has a market value of $36.2 billion, were still trading up 4% in midday trading Wednesday after the company raised its full-year adjusted earnings forecast

Constellation invested $4 billion in Canopy in October 2017, but last year, Newlands said that he was not pleased with Canopy’s results.

In December, the brewer announced that Chief Financial Officer David Klein would be the marijuana grower’s new chief executive, effective Jan. 14. On Wednesday, Newlands told analysts that Klein would bring “more focus and discipline” to the business.

Overall, Canopy shares are down 30% over the last year. The company has yet to turn a profit and is investing heavily in expansion.

Newlands still thinks there is hope. In October, a year after permitting recreational marijuana use, Canada legalized marijuana-based vapes, edibles and beverages — products with higher profit margins, presenting an opportunity for Canopy.

Canopy is rolling out its own vapes and edibles, as well as cannabis-infused beverages made with Constellation.

“We couldn’t be more excited to see these products in the marketplace,” Newlands said.

The Modelo brewer’s bet on cannabis came as U.S. consumption of beer declined and legalized cannabis was seen as a threat to all alcohol categories. Some health conscious consumers are skipping alcohol altogether. Those who still drink are choosing spirits, higher value wine, premium beer or hard seltzer, the summer’s biggest alcohol trend.

To capitalize on that trend, Constellation is planning to launch a Corona-branded hard seltzer around the start of fiscal 2021. But it will be entering a crowded market. White Claw, the market leader, dominates the category. Other options include Anheuser-Busch InBev’s Bon & Viv and Boston Beer Company’s Truly.

Constellation has also been selling off some of its portfolio to respond to changing consumer tastes. In December, the company announced a deal to sell its Ballast Point beer brand.

Excluding the loss on the Canopy investment and other items, Constellation’s adjusted quarterly earnings of $2.14 per share topped analysts’ estimates of $1.85 per share. The company reported revenue of $1.99 billion, beating Wall Street’s expectations of $1.95 billion.

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