What this beer giant just said about Marijuana Stocks – The Fool Motley

Constellation Brands (NYSE: STZ) is best known for its beer, wine and spirits brands, including Corona Light, Robert Mondavi and Svedka Vodka. But it's also a marijuana stock.

The company has acquired a 38% interest in the leading cannabis company in Canada, Cover growth (NYSE: CGC)In 2018, and this week, it helped to better understand the potential of marijuana to justify its $ 4 billion investment. This is what Constellation is saying about this emerging industry.

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Globally, consumers spend $ 150 billion on marijuana, including $ 6 billion in Canada and $ 50 billion in America. Given that the size of the marijuana market is comparable to that of tobacco and alcohol, it is not surprising that Constellation Brands is eager to partner with Canada's largest cannabis company. according to its turnover and market capitalization.

Constellation Brands had originally acquired just under 10% of Canopy Growth for $ 245 million in November of 2017. Encouraged by what she saw, she did a lot more splashing last August, spending 5% more than $ 5 billion. billions of dollars to increase its participation to 38%. The Company also acquired warrants to increase its ownership interest to more than 50% to a minimum of C $ 4.5 billion, if exercised.

This initiative allows Constellation Brands to benefit from the growing momentum to legalize marijuana around the world. Canada became the first major developed country to create a national adult recreation market last year, but this is not the only place where people are adopting pro-pot laws. Germany and Australia have nascent national markets for medical marijuana and 33 US states have laws authorizing the use of marijuana for medical purposes, including 10 states that have also approved recreational use by adults.

The evolution of cannabis regulation could have a significant impact on the core business of Constellation Brands beer, wine and spirits. According to a study conducted in 2017 by the investment company Cowen & Company, alcohol consumption has declined compared to cannabis, in accordance with current pot laws.

What are the prospects for marijuana?

The potential widespread legalization of marijuana is exciting, as it could overshadow more than $ 100 billion in spending. It's not just the dried marijuana flower that could take off, though. Canadian cannabis companies generate substantial revenues 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 of incorporating THC and CBD as ingredients in food and beverages could represent several billion dollars more for Constellation Brands, Canopy Growth and its competitors.

At the annual consumer analyst group conference in New York this week, Constellation Brands has highlighted the fact that more than 30 countries are studying pro-pot laws. If all of them legalized marijuana, it would create a market of more than $ 200 billion a year in 15 years, including $ 96 billion in the United States. In comparison, Americans currently spend $ 77 billion, $ 65 billion and $ 58 billion on cigarettes, wine and spirits a year. About 80% of this market would be branded products, rather than dry marijuana flowers.

Constellation Brands estimates that Canopy Growth will reach an annual business turnover of $ 1 billion by 2020 and that its investment in Canopy Growth could have a positive impact on its earnings as early as the year 2021.

The long-term tailwind could, however, be much larger. In 15 years, Constellation Brands believes that Canopy Growth can capture 30% to 40% of the $ 11 billion marijuana market, 5% to 15% of the marijuana market in the United States and 5% in the United States. % to 15% of sales elsewhere. Using the bottom of these assumptions, Canopy Growth's annual revenue exceeds $ 14 billion at that time.

In addition, Constellation Brands estimates that Canopy Growth's operating margin could be at least 30% in Canada and the United States and at least 20% elsewhere. If they are right, Canopy Growth would generate about $ 3.7 billion in operating profit per year in 15 years. To put this number into perspective, Constellation Brands sales were $ 7.6 billion and operating profit was $ 2.3 billion last year.

What to look next

For the marijuana market to reach these goals, there are a few things to do. First, efforts to legalize marijuana must succeed. Second, legalization must include products that use marijuana as an ingredient, such as beverages. Third, Canopy Growth needs to maintain its market leadership. None of these things is a given.

Until now, Canada is the only large market developed for acceptable recreational uses and has not yet approved the sale of edible products or beverages. In addition, the competition is tough. The heels of Canopy Growth are among the well-funded players including Aurora Cannabis (NYSE: ACB), Aphria (NYSE: APHA), Tilray (NASDAQ: TLRY), and Cronos Group (NASDAQ: CRON). These are leading marijuana stocks, and none of them will willingly allow canopy freedom in this market. Therefore, investors will want to monitor and see if other countries are following in Canada's footsteps, if Canada allows cannabis products, such as beverages, and how their competitors decide to fight Canopy Growth to win market shares.