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Jan 9, 2019

Constellation Brands plunges most in 6 years on forecast cut

Constellation Brands plunges after alcohol giant cuts forecast

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Constellation Brands Inc. (STZ.N), the alcohol giant betting big on the cannabis industry, plunged the most since 2013 after the company cut its profit outlook and indicated its beer business is slowing down.

The company, which makes Svedka vodka, Robert Mondavi wine and Modelo beer, said it expects a decline in profit and sales from its wine and spirits business for the current fiscal year. It also cited higher interest expenses from its high-profile investment in pot producer Canopy Growth Corp. Higher transportation costs and marketing investment are also hurting its outlook, according to the latest earnings report.

Constellation’s beer business, which includes U.S. sales of the Modelo and Corona brands, is starting to slow after years of growth that have outpaced the broader market. But with consumption waning, Constellation is showing signs of weakness.

“Seemingly, this slowdown reflects the more anemic growth that we’re seeing in the broader beer category,” Vivien Azer, an analyst at Cowen & Co., said in a research note.

Constellation’s shares slipped as much as 12 per cent to US$152.51 on New York on Wednesday, the biggest intraday drop since Jan. 31, 2013.

Beer depletions, a measure of how much the company’s distributors are sending to retail customers, were up 7.8 per cent in the quarter, while analysts had estimated 9.2 per cent growth, on average.

Cannabis Bet

Constellation has raised its profile with a major investment in cannabis. But its roughly 38 per cent stake in Canopy, now the world’s most valuable pot company, isn’t boosting results yet. For now, Constellation is trying to maintain beer growth while pushing its wine and liquor portfolio more upscale.

Modelo, which is generally more expensive than mass-market competitors like Budweiser and Coors Light, has benefited as U.S. consumers trade up for better alcohol. Constellation has also tried to position more of its liquor and wine, such as Black Box vodka and Casa Noble tequila, as premium products.

Incoming Chief Executive Officer Bill Newlands, who is scheduled to take the helm in March from longtime leader Rob Sands, will face pressure from investors to boost the alcohol operations, while also navigating the company’s push into marijuana. And while its sales of Corona and Modelo remain solid, investors have high expectations for Constellation, said Ken Shea, an analyst at Bloomberg Intelligence.

“This has been a growth stock, and investors want growth,” he said.