Constellation Brands, Inc. Class A (NYSE: STZ) stock fell 12.42% on January 9th, 2019 (Source: Google finance) after the company cut its profit outlook for fiscal 2019 citing weakness in wine and spirits sales and costs related to its investment in a Canadian pot producer, sending its shares down to a near two-year low. The lowered forecast reflects an about 25 cent per share pre-tax impact to full-year profit due to higher interest expenses the company expects to pay to finance the marijuana investment that was mainly backed by debt. Weak results from Canopy Growth in November weighed on Constellation, resulting in a $164 million decrease in the fair value of its investment in the third quarter.
Meanwhile, another strategic imperative for the company is cannabis, as evidenced by its $4 billion stake in Canadian marijuana producer Canopy Growth. Constellation, which also presides over popular beer brands Corona and Modelo, now has warrants to make its nearly 40 percent stake in Canopy even larger.
Even with that and the wine consumption downtick, the company plans to return $4.5 billion to shareholders in the next three years via dividends and buybacks
Constellation’s beer business, which includes U.S. sales of the Modelo and Corona brands, is starting to slow after years of growth that have outpaced the broader market. But with consumption waning, Constellation is showing signs of weakness. Modelo, which is generally more expensive than mass-market competitors like Budweiser and Coors Light, has benefited as U.S. consumers trade up for better alcohol. Constellation has also tried to position more of its liquor and wine, such as Black Box vodka and Casa Noble tequila, as premium products. Beer depletions, a measure of how much the company’s distributors are sending to retail customers, were up 7.8 percent in the quarter, while analysts had estimated 9.2 percent growth, on average.
STZ in the third quarter of FY 19 has reported the adjusted earnings per share of $2.37, beating the analysts’ estimates for the adjusted earnings per share of $2.04. The company had reported the adjusted revenue growth of 9 percent to $1.97 billion in the third quarter of FY 19, beating the analysts’ estimates for revenue by 3.25%. However, advertising costs coupled with higher transportation fees resulted in a 38 percent fall in third-quarter profit and a 60 basis point drop in operating margins.
Constellation now expects earnings per share for fiscal 2019 to be between $9.20 and $9.30, down from its prior forecast of $9.60 to $9.75. Analysts were expecting full-year earnings of $9.43 per share, according to IBES data from Refinitiv.