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

Constellation Brands, Inc. Class A STZ announced Wednesday an agreement to augment its stake in Canopy Growth Corp CGC from 9.9 percent to 38 percent.

The Analyst

Reviewing the transaction, Bank of America Merrill Lynch analyst Bryan Spillane reiterated his Buy rating on Constellation Brands, but reduced his price target from $250 to $230.

The Thesis

The expansion of Constellation's strategic relationship with Canopy Growth would increase its exposure to the cannabis market, while also providing funds for the latter, Spillane said in a Aug. 15 note.

The analyst noted Constellation Brands will receive additional warrants exercisable over the next three years, which when exercised would bring the company's ownership in Canopy Growth to 55 percent.

The increased investment, according to Spillane, means Constellation Brands can not only co-develop beverages but also participate in the development of medical/recreation cannabis on a global scale.

For Canopy Growth, the deal provides the much-needed finance to fund its expansion globally and consolidation in the Canadian market, BofA said.

"In our view, recreational expansion with cannabis based ingredients is likely to draw similar investment from other food/beverage cos," the firm said. Citing addition of interest on $4 billion of debt, the firm lowered its 2019-21 EPS estimates for Constellation Brands.

The Price Action

Constellation's stock, which shed 6 percent Wednesday, was down another 3 percent Thursday around $202.06 per share.

Related Links:

As Millennials Pivot From Booze To Buds, The Beer Industry Strikes Cannabis Partnerships

Citron Calls Tilray 'Next In Line' In Surging Cannabis Sector, Sets $45 Price Target