Risky expansion may help take Constellation to new heights

Dear Mr. Berko:

This year, I plan to put $6,500 in my individual retirement account into the American Funds Global Balanced Fund, which my stockbroker says will outperform the stock market in the coming decade. I am 60 and intend to work till I’m 70. What is your opinion of American Funds?

Also, a friend working for Constellation Brands suggested I buy stock in his company because it’s going to be big in the cannabis business. He says it’s public knowledge. I’d appreciate your thoughts.

– L.D., Moline, Ill.


Dear L.D.:

Of course the broker wants to sell a mutual fund. The American Funds Global Balanced Fund (GBLAX) pays your broker a 5.75 percent sales fee, but that fund’s poor record is an embarrassment. Go to Charles Schwab and buy 30 shares of Constellation Brands.

Marijuana is surreptitiously everywhere but difficult to get in most states unless you’re intimate with the dark alleys, motorcycle bars and seamy edges of your city. Constellation Brands (STZ-$221) is an $8 billion producer and marketer of beers, wines and the harder stuff. If you’ve gotten a buzz from a Corona, a Modelo, a Robert Mondavi, a Woodbridge, a Taylor, a Paul Mason, a Ruffino or a Manischewitz, you’re an STZ customer. Black Velvet, Wild Irish Rose, McMasters, Svedka and Casa Noble are also popular STZ drunk kits. STZ markets a passel of outstanding craft beers — plus an intriguing range of craft whiskeys produced by High West, a recent STZ acquisition. Because these labels provide a high-end buzz, they augur top- and bottom-line growth. Some 93 percent of sales derive from the U.S., while Canada, New Zealand and Europe claim the remaining 7 percent. STZ has been on a buying spree for the past few years, recently acquiring Funky Buddha, a craft brewer that’s among the fastest-growing labels in Florida. While beer is STZ’s most significant growth product, management’s diversification is aimed at growing the company’s long-term revenue and earnings. Read on. As your friend said, the best is yet to come.

Constellation is chasing a new buzz and recently took a 9.9 percent stake in Canopy Growth (11L1-$8.51), with an option to acquire another 9.9 percent. Canopy Growth is a Canadian company that’s the world’s largest cannabis grower. It’s listed on the Toronto Stock Exchange with a $1.7 billion valuation. This $191 million acquisition gives STZ a good grip in an industry that many believe will be fully legalized by the U.S. in a couple of years. Canopy and STZ intend to develop and market cannabis-infused beverages. And given what’s happening at the state level, Canopy may soon be marketing drinkable cannabis without alcohol, such as laced sodas, coffees and other elixirs. STZ’s management has no plans to sell cannabis products in the U.S. until pot is legalized nationwide. However, STZ plans to retail these products in Canada, where edible and drinkable cannabis products are expected to be legalized by the end of the year. Cannabis is a multibillion-dollar market that can produce multibillion-dollar profits. And I suspect that most of STZ’s corporate board and management, as far down as midlevel executives, are sampling product in the interest of research.

When the stock market melted in 2007, Constellation’s share price imploded to $11. Earnings were an uninteresting $1.44 a share, and revenues were $3.7 billion, while the dividend was a miserly $1.24. This year, management expects to report share earnings of $8.40 on revenues of $7.8 billion, and the board, after sampling some product, decided to pay a $2.08 dividend. During the same time frame, net profit margins have improved fourfold, to 22.6 percent. Cash flow has grown fivefold, and return on capital has grown nearly threefold. By 2022, share earnings could exceed $12.25. Revenues could come in at $10.5 billion, and it’s possible that the dividend will be $2.55. And none of those numbers includes anticipated sales from marijuana products. I believe that by 2024, cannabis products could account for 30 percent of STZ’s revenues and 60 percent of its profits, and I think the dividend could be $3.25. However, before those numbers have a chance to prove themselves, I suspect that Amazon will buy STZ’s business, allowing for the possibility that high-flying drones will deliver the product to your doorstep.

Zacks, Standard & Poor’s, Market Edge, Bank of America, Thomson Reuters, Argus Research, J.P. Morgan and Citigroup are recommending the stock. I am, too.•

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at mjberko@yahoo.com.  The opinions expressed in this column are those of the author.

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