In recent months, cannabis stocks have gained serious momentum on the possibility that the U.S. may reschedule marijuana at the federal level, which would be a significant win for these companies from a research, taxation, and labor perspective. More recently, the industry got another boost when Ohio voters made recreational marijuana legal - and looking ahead, Germany has its own landmark vote scheduled for next year.
Against this backdrop, cannabis stocks could potentially generate outsized gains for shareholders in the upcoming decade. But right now, several cannabis stocks are small- or micro-cap companies reporting massive losses. Many of these stocks are listed on the OTC markets, and remain speculative bets for long-term investors.
But as the upcoming wave of legalization may unlock multiple billion-dollar markets for cannabis companies, one top-rated cannabis stock worth considering is Constellation Brands (STZ). Valued at a market cap of $43.96 billion, Constellation Brands produces, sells, and markets beer, wine, and spirits in the U.S., Canada, Mexico, Italy, and New Zealand.
Back in 2017, this well-established vice stock entered the pot ring by investing $190 million in Canadian cannabis company Canopy Growth (CGC), taking a 10% stake. In the following year, Constellation Brands invested another $4 billion, increasing its CGC stake to 38.6%.
What Is Canopy Growth Worth?
Shares of Canopy Growth have fallen by 99% from all-time highs, valuing the company at $431.9 million by market cap. The Canadian marijuana producer has been wrestling with mounting losses and high inventory levels in the past five years. In order to offset its cash burn rates, Canopy Growth has reduced its manufacturing capabilities and reduced its employee count. Last year, Constellation Brands wrote down its equity stake in Canopy Growth by $1.1 billion due to goodwill impairment charges.
That said, while Canadian marijuana producers are grappling with negative profit margins, multi-state operators in the U.S. - such as Green Thumb Industries (GTBIF) - are reporting consistent profits. The U.S. is a much larger market compared to Canada, allowing licensed cannabis producers to benefit from economies of scale. Additionally, a report from Fortune Business Insights expects the global cannabis market to grow by 34% annually through 2030 to almost $444 billion, up from just $57 billion in 2023.
Looking ahead, Canopy Growth has strategic acquisition deals with Acreage Holdings (ACRHF), a multistate cannabis operator in the U.S., as well as with edibles manufacturer Wana Brands. Constellation’s expertise in the alcohol business may also enable Canopy to scale its cannabis-infused beverage business rapidly in the next few years.
In the last 12 months, Acreage has reported revenue of $233 million with $17.57 million in operating losses. Comparatively, in 2019, the company reported revenue of $74 million with an operating loss of $178 million.
How Did Constellation Brands Perform in Fiscal Q2?
While Constellation Brands has a sizeable stake in Canopy Growth, it remains one of the largest beer manufacturers globally. It is the number one brand among beer manufacturers in the U.S., and increased beer sales by 12% in fiscal Q2 of 2024 (ended in August). Comparatively, overall sales were up 7% year over year in Q2. Constellation Brands is now looking to gain traction in the high-margin premium beer and wine segments, which is also a fast-growing market.
Priced at 20 times forward earnings, STZ is reasonably priced, given analysts expect adjusted earnings to rise by 11% annually in the next five years.
Currently, STZ pays shareholders a quarterly dividend of $0.89 per share, translating to a dividend yield of 1.45%. These payouts have risen by 14% annually in the last eight years, and the payout ratio of 29.5% indicates there's room for this dividend to keep growing.
Out of the 17 analysts tracking Constellation Brands, 14 recommend “strong buy,” one recommends “moderate buy,” and only two recommend “hold.” The average price target for STZ is $293.33, which is 22% higher than current levels.
