This is Why Susquehanna Just Downgraded Constellation Brands

Alcohol beverage maker Constellation Brands shook up Wall Street this month when it announced that it has upped its stake in Canadian marijuana company Canopy Growth.

According to one analyst however, the company is overvalued.

Susquehanna analyst Pablo Zuanic downgraded the stock from “neutral” to “negative” and lowered his price target on the stock from $199 to $171.

According to the analyst’s research note, the company had justified its $4-billion investment in Canopy Growth by highlighting the creation of a “fourth leg.”

Zuanic however thinks the company’s “three legs” are imbalanced. He noted that beer accounted for 70 percent of earnings in fiscal 2018, wine at 25 percent and spirits at 5 percent.

The analyst wrote, “STZ is a company guiding for ~10% medium-term EPS growth, with 4.7x leverage, and what we see as significant reinvestment risk, yet it trades at an unwarranted 25% peer premium.

We could add political risk to these issues (state of the Hispanic consumer? volatile trade negotiations with Mexico?). Examples of the reinvestment risk include the approach for $26Bn market cap May last year; a record craft beer multiple paid for Ballast; and, now the $4Bn investment in the cannabis industry, worth three years of STZ FCF. While the stock’s sector premium has narrowed to ~25% on 1yF Factset EV/EBITDA (16% on P/E, but given the high leverage we do not think P/E is the right valuation tool here), we think such a premium is not justified given the above growth and risk metrics.”

The Corona beer brewer recently said it would raise its stake in Canopy to 38 percent. The two companies described Constellation’s investment as the biggest investment in the burgeoning marijuana industry yet.

“This is rocket fuel,” Canopy Chief Executive Officer Bruce Linton remarked. “We’re going to be way more global.”

“Over the past year, we’ve come to better understand the cannabis market, the tremendous growth opportunity it presents, and Canopy’s market-leading capabilities in this space,” said Constellation CEO Rob Sands.

Disclaimer: We have no position in Constellation Brands, Inc. (NYSE: STZ) nor Canopy Growth Corp. (NYSE: CGC) and have not been compensated for this article.