Constellation Brands Is Overvalued, Susquehanna Says In Downgrade

Alcoholic beverage producer Constellation Brands, Inc. STZ is trading at a notable valuation premium to the broader market which can't be justified — especially after its $4-billion investment in cannabis company Canopy Growth Corp CGC, according to Susquehanna Financial Group. 

The Analyst

Analyst Pablo Zuanic downgraded Constellation Brands from Neutral to Negative with a price target lowered from $199 to $171.

The Thesis

Constellation Brands justified its $4-billion investment in Canopy Growth by highlighting the creation of a "fourth leg," Zuanic said in the downgrade note. (See the analyst's track record here.) 

Yet the company's "three legs" are imbalanced, with beer accounting for 70 percent of earnings in fiscal 2018, wine at 25 percent and spirits at 5 percent, the analyst said.

The company's sizeable investment in the cannabis industry comes with questions about the industry's real growth potential and competitive concerns, Zuanic said, with headline risk coming from larger consumer packaged good companies entering the space.

Constellation's high leverage of 4.7 times fiscal 2019 may imply a simple P/E multiple isn't the best tool to value the stock, the analyst said. A 15.4 times EBITDA multiple — 25-percent premium to the sector — seems "more valid," but is also too rich for a company that guided for medium-term EPS growth of around 10 percent, he said. 

Price Action

Constellation Brands shares were trading lower by 1.67 percent to $200.52 off the open Monday. 

Related Links:

Canaccord: Constellation Brands Investment A 'Transformational Event' For Canopy Growth

BofA Trims Constellation's Price Target, Sees Similar Investments From Beverage Companies On The Horizon