This Number One U.S. Beer Company Just Bet Big on Marijuana

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Constellation Brands ranks as the No. 1 premium beer company in the U.S., with best-selling brands Corona and Modelo. While the beer industry, in general, hasn’t grown all that much, Constellation has generated industry-leading growth thanks to its high-end and craft beers. But Constellation Brands is also a marijuana stock now, thanks to its 38% ownership stake in big Canadian marijuana producer Canopy Growth (NYSE:CGC). 

Constellation made a multibillion-dollar bet on Canopy Growth because it thinks cannabis is a “once-a-century disruptive market transition” and that Canopy Growth is the best marijuana supplier in the world. The company is one of several beverage makers that have been attracted to the possibility of launching a new category of beverages — cannabis-infused drinks. In addition, beverage companies have been concerned that marijuana legalization could negatively affect the sales of alcoholic beverages. By getting involved in the marijuana industry, Constellation hopes to offset any losses from shifts in consumer demand from alcohol to marijuana beverages. 

But just how big is the cannabis opportunity? Constellation believes the total addressable global market could top $230 billion within the next 15 years. 

Of course, Constellation and Canopy won’t be able to capture all of that market. Still, Constellation projects that Canopy could realistically claim up to 40% of the Canadian market and between 5% and 15% of the market in the rest of the world, including the United States. 

Capacity shouldn’t be an issue. Canopy Growth has 4.3 million square feet of growing space licensed for production. The company’s total growing space is 5.6 million square feet — the most of any Canadian marijuana producer

As for distribution channels, Canopy secured supply agreements for the recreational marijuana market with all of Canada’s provinces. The company has a strong global presence, with operations in Australia, Europe, Latin America, Africa, and the Caribbean. Constellation’s retail operations in the U.S. would also provide an immediate distribution channel for Canopy’s cannabis products should federal laws change to allow the company to expand into the U.S. market.

Constellation and Canopy together present a combination that’s currently unmatched in the global marijuana industry. While there are other partnerships between major Canadian marijuana producers and companies outside the industry, none of them are as tightly integrated and well positioned competitively as that of Constellation and Canopy.

The obvious question, though, is, why go with Constellation Brands instead of Canopy Growth? The primary advantage for buying Constellation is that the company’s core beer, wine, and spirits businesses provide stability while it also stands to benefit from potentially explosive growth in the global marijuana industry through its stake in Canopy. Constellation also holds the option to buy a majority interest in Canopy Growth in the future, something the company is likely to do if the marijuana market grows as quickly as anticipated.

In addition, Constellation has a couple of other pluses. Its stock trades at a forward price-to-earnings ratio (share price divided by predicted earnings per share) of less than 18 and a price-to-sales ratio (share price divided by sales per share) of 4.3 — a much more attractive valuation than Canopy Growth claims. Constellation also pays out a modest dividend yield (annual dividend paid divided by share price) of 1.6%.