Constellation Brands Inc. (NYSE: STZ) is one of our favorite pot stocks. It took a hit as global trade tensions cast a shadow over growth prospects, but those storms passed quickly, as we predicted.
And Constellation's earnings report on Friday (June 28) proved us right. The earnings report ignited a 6% surge in the stock, which jumped from $185.54 to $197.18 a share.
That's nothing outlandish, but it follows a pattern we've been tracking for a good while now: Constellation Brands keeps stretching Wall Street's imagination. That's because the $38 billion alcoholic beverage company isn't content with imported beer; it's branching out into the fast-growing cannabis sector, which is projected to be worth $66.3 billion by 2025.
And the results are already starting to show.
Constellation managed to deliver $2.21 earnings per share in Q1 2019, beating some estimates by 6.8%. It also posted surprise earnings in the previous quarter, beating expectations by 7.6%.
The report also shows Q1 revenue increased 2.5% year over year. The company lost significant cash flow from investing activities over the last year - namely its $4 billion Canopy Growth Corp. (NYSE: CGC), which just fired CEO Bruce Linton over a bad fourth quarter. But it also had 18% more net cash from operating activities since last year. Plus, Constellation has high rebound hopes for Canopy, and we agree.
And there's plenty of reason to believe that even Wall Street's current $233 share price target is not generous enough. Wall Street has yet to fully appreciate the growth potential of Constellation Brands.
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This stock has grown 20% in the last six months, and Wall Street projects it will grow another 46% with a high target of $288. That'll register as 66% growth in the next 12 months.
Today, the stock sells at 12.71 times earnings in an industry that averages above 19.56, a sign of massive headroom for growth. So we think this is just the start for STZ, even with Canopy Growth's underperformance.
Constellation Brands CEO Bill Newlands announced that Constellation was unhappy with Canopy's recent year-end report shortly after its Q1 earnings report. Constellation owns a 38% stake in Canopy, so it wasn't pleased with Canopy's $245 million in losses.
That's what made last week's headlines. But the fine print said Constellation was still optimistic about Canopy's future, as are we.
Despite net losses, Canopy actually increased net revenue in 2018 for having acquired the German vaporizer company Storz & Bickel, a move praised by Constellation CFO David Klein.
Constellation still anticipates $1 billion in annualized revenue from Canopy at the end of the current fiscal year.
And we're still approaching the biggest catalyst of all for Constellation: cannabis legalization.
Constellation Brands Stock Is Riding the Cannabis Revolution
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ArcView Market Research reported the recreational marijuana market in North America will grow from $4.2 billion in 2018 to $14.9 billion in 2021.
That's 255% growth in just four years. And Constellation is reportedly pursuing a line of cannabis-infused beverages, a market expected to grow 147%, worth $1.4 billion by 2024.
It's a big reason one of the marijuana industry's largest bulls by market cap, at $37.84 billion, doesn't seem to be flinching at the market's minor ebbs and flows.
The cannabis wave is just too great. And Constellation has yet to be proven wrong.
The Money Morning Stock VQScore™ system also flagged STZ as a breakout stock. This is a proprietary system that finds stocks ready for a price jump. And Constellation Brands has a perfect 4.75 VQScore, meaning its earnings per share is accelerating.
This stock has seen a gradual climb recently, but it's ready to break out even further. You can thank all the global trade hubbub for putting it at a discount.
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.