STZ. Now May be a Good Time to “Find Your Beach”

This newsletter will be composed of 4 parts.
(1) Constellation Brands (STZ)
(2) Constellation Brands’ history of success
(3) Forward looking management and Canopy Growth Corporation (CGC)
(4) Now may be a good time to “Find Your Beach”

Constellation Brands, founded in 1945, is an international producer and marketer of beer, wine, and spirits (valued at about $38B today). Thanks to successful marketing strategies, most people are familiar with Constellation Brands’ products. In the beer industry, Constellation Brands has the exclusive right to import, market, and sell many Mexican beer brands in the United States. Some of these brands include: Corona Light, Corona Extra, Modelo Especial, and Modelo Negra. Constellation Brands’ wine segment includes Robert Mondavi, The Dreaming Tree, The Prisoner, Ravage, and Mount Veeder. The spirits segment includes SVEDKA Vodka, Casa Noble Tequila, and Black Velvet Whisky.

Since 2010, Constellation Brands is up over +1,000% while the S&P500 is up about +130%. Assuming dividends are being reinvested, a $10,000 investment in Constellation Brands at the beginning of 2010 would be about $140,000 today. On the other hand, a $10,000 investment in the S&P 500 at the beginning of 2010 would be about $31,000 today.

Since 2010, Constellation Brands has outperformed its peers like Anheuser-Busch InBev (BUD), Brown-Forman (BF.B), Diageo (DEO), and Molson Coors (TAP). Since then, these companies are up about +46%, +230%, +103%, and +41% respectively.

Constellation Brands’ history of success can be contributed to many factors including: outstanding management, timely acquisitions, management’s ability to bring value to acquisitions made, a distinguished corporate culture, management’s ability to understand consumer behavior, and successful marketing strategies.

As you will see below, Constellation Brands has been able to grow revenues and earnings at an impressive rate. (Source: Morningstar).

In addition to growing revenues and earnings at an impressive rate, in April 2015, Constellation Brands’ Board of Directors approved the initiation of a dividend program and has raised the dividend aggressively.

One of the many reasons Constellation Brands has been successful in generating long-term returns is management’s ability to think ahead. This has led Constellation Brands to make timely acquisitions that add long-term value to shareholders. For example, in June 7, 2013, Constellation Brands announced its acquisition of Grupo Modelo’s U.S. beer business from Anheuser-Busch InBev for about $4.75B. At that time, this acquisition nearly doubled Constellation Brands’ sales and solidified Constellation’s position as the #1 multi-category
supplier for beer, wine, and spirits in the U.S. And this acquisition, amongst other things, is collectively responsible for the strong revenues, earnings, and dividend growth we have seen from Constellation Brands in recent years.

And despite its history of success, management is trying to maintain or exceed its growth rate of the last several years.

This has led Constellation Brands to take a fairly large ownership stake in Canopy Growth Corporation. Canopy Growth is an Ontario, Canada-based cannabis company (Canopy offers medicinal and recreational products). As of today, Canopy Growth is valued at about $8B —making it one of the world’s sizable cannabis companies. In hopes of continuing its growth, Canopy has been expanding its reach to countries such as Australia, Brazil, Chile, Czech Republic, Denmark, Germany, Jamaica, and Spain.

In October 30, 2017 Constellation Brands announced that it had signed an agreement to acquire a minority (9.90%) stake in Canopy Growth. And just a few months ago, in August 15, 2018, Constellation Brands announced that it is increasing its Canopy Growth stake to 38%.
Furthermore, Constellation Brands set up the agreement in a way that allows them to take a majority stake in Canopy.

Intending to finance its investment in Canopy Growth, Constellation Brands has priced the public offering of $2.15B of Senior unsecured notes. Constellation brands also intends to use commercial paper and its cash on hand. Furthermore, Constellation Brands is looking to sell some of its U.S. based wine brands that could be worth more than $3B. This may be an indication that management is trying to free up extra cash that would allow Constellation Brands to take a majority stake in Canopy Growth in the near future.

Because of this stake in Canopy, Constellation Brands now adds the cannabis business to its already-strong beer, wine, and spirits segments. I believe that this is a calculated acquisition that will help generate long-term returns for shareholders (similar to past acquisitions made by Constellation Brands).

Considering management’s tremendous track record in increasing long-term shareholder value, specifically through acquisitions and the ability to add value to acquisitions, I am comfortable with Constellation Brands taking a stake in Canopy.

The cannabis industry could potentially offer explosive growth over the next decade. Take a look at Colorado’s total marijuana sales since 2014 (cannabis in Colorado has been recreationally legalized since the passing of Amendment 64 in January 2014).