Constellation Brands (NYSE: STZ) is best known for its top beer, wine and spirits brands, including Corona Light, Robert Mondavi and Svedka Vodka. But it's also a marijuana store.
The company acquired a 38% stake in Canada's market-leading cannabis company, Canopy Growth (NYSE: CGC) in 2018, and this week offered some insight into marijuana potential to justify its investment of 4 billion dollars. Here's what Constellation says about this new industry.
Suds two buds
Globally, consumers spend $ 150 billion on marijuana, including $ 6 billion in Canada and $ 50 billion in America. The size of the marijuana market is competing with tobacco and alcohol, so it is not surprising that Constellation Brands was eager to work with Canada's largest cannabis company on revenue and market value.
Initially, Constellation Brands achieved slightly less than 10% of Canopy Growth for $ 245 million in November 2017. Encouraged by what it did, it made a much larger splash in August, spending $ 5 billion to increase its stake to 38 %. It also bought warrants that allow it to increase ownership to over 50% for at least $ 4.5 billion, if exercised.
The move makes Constellation Brands benefit from increasing momentum to legalize marijuana worldwide. Canada became the first major developed country to create a national recreational market for adult use last year, but it is not the only place where people pass pro-pot laws. Germany and Australia have emerging national medical marijuana markets, and 33 some US states have adopted laws that allow medical marijuana use, including 10 states that have also resigned for recreational use for adults.
The shift in cannabis regulation can have a major impact on Constellation Brands' core beer, wine and spirits business. Alcohol consumption has declined in proportion to cannabis in pro-pot jurisdiction, according to a 2017 study by the investment company Cowen & Company.
What is marijuana view?
The potential widespread legalization of marijuana is exciting because it can shift over $ 100 billion in spending out of the shadows. It's not just dried marijuana flower that can take off, though. Canada's cannabis companies generate significant revenue from marijuana extracts, including THC and cannabidiol (CBD) oils. THC, the most common chemical cannabinoid in marijuana, is associated with the psychoactive effects of marijuana, while CBD, the second most common cannabinoid, is associated with well-being.
The potential for incorporating THC and CBD as food and beverage ingredients can be worth many billions more to Constellation Brands, Canopy Growth, and its competitors.
At the annual Consumer Analysis Group of the New York Conference this week, Constellation Brands highlighted the fact that over 30 countries are exploring pro-pot laws. If all of them legalize marijuana, it will create a market worth over $ 200 billion annually in 15 years, including $ 96 billion in the United States. By comparison, Americans currently spend $ 77 billion, $ 65 billion, and $ 58 billion on cigarettes, wine, and spirits annually. About 80% of this market will consist of branded products, instead of dry marijuana flower.
Constellation Brands estimates that Canopy Growth will achieve an annual sales rate of $ 1 billion by 2020, and that investment in Canopy Growth may be accretive to its revenue as early as financial 2021.
However, the long-term backwash could be much larger . For 15 years, Constellation Brands believes that Canopy Growth can take up 30% to 40% of Canada's $ 11 billion marijuana market, 5% to 15% of the US marijuana market, and 5% to 15% of sales everywhere. Using the low end of these assumptions, Canopy Growth's annual revenue points over $ 14 billion at that time.
Furthermore, Constellation Brands estimates that Canopy Growth's operating margin may be at least 30% in Canada and the United States, and at least 20% everywhere. If they are right, Canopy Growth will generate around $ 3.7 billion annually in its 15-year operating profit. To put this figure into perspective, consider that Constellation Brands' revenues were $ 7.6 billion and operating revenues were NOK 2.3 billion last year.
What to see next
For the marijuana market to deliver these goals, some things must happen. First, the efforts to legalize marijuana must succeed. Second, legalization must include products that use marijuana as an ingredient, such as beverages. And thirdly, Canopy Growth must maintain its industry leadership. None of these things are given.
So far, Canada's only large, developed market is OK recreational, and it's still approving the sale of edible or beverage. In addition, the competition is stiff. Nipping that Canopy Growth's heels is a slate with well-funded players, including Aurora Cannabis (NYSE: ACB) Aphria (NYSE: APHA) ] Tilray (NASDAQ: TLRY ) and Cronos Group (NASDAQ: CRON) . They are top-tier marijuana stocks, and none of them will willingly allow Canopy Growth free rein over this market. Therefore, investors want to see and see if other countries follow in Canada's footsteps if Canada greets the light of cannabis derivatives such as beverages and how competitors decide to fight Canopy Growth for market share.