Constellation Brands May Be Getting a High From the Run-Off Election

Constellation Brands (NYSE:STZ) will report earnings before the market opens on January 7. The consensus of analysts is for the company to post earnings of $2.41 per share on revenue of $2.22 billion. On a year-over-year (YOY) basis, that would be a 20% gain in earnings.

That won’t necessarily shock investors. The problem is that it won’t necessarily excite them either. Constellation proved during the pandemic that it could still deliver solid, albeit not spectacular, numbers.

According to Barron’s it appears that rising beer shipments may be a catalyst in this quarter. Constellation is the largest importer of beer in the United States (measured by sales). The company also has the third-largest market share of all major beer suppliers.

However, STZ stock is up about 2.5% in early morning trading the day before it reports. Is that because the street expects a beat, or is something else in play? I think it’s the latter. And for that you need to look no further than the recent run-off election in Georgia.

Is Georgia the Canary In the Coal Mine?

As it looks more likely that Senate will be deadlocked at 50-50, it changes the calculus for potential legalization of marijuana in the United States. That’s not a prediction. The issue of legalization is more complex than that.

However, with the Democratic party looking to be in control of both houses of Congress (i.e. Vice President-Elect Kamala Harris will be the tie-breaking vote), it would appear that all the Democratic party would need to do is not lose a vote on their side of the aisle.

And full legalization isn’t the only step that can be taken. President-elect Biden has expressed his support for decriminalization of marijuana offenses.

Any movement towards legalization will benefit Constellation Brands which is a major investor in Canopy Growth (NASDAQ:CGC). Constellation made its decision to pump money into Canopy in 2018 with the intention of producing and distributing cannabis-infused beverages. That investment is appearing to pay off as Canopy introduced its first cannabis-infused beverage, Tweed Houndstooth & Soda, in 2020

With that said, Canopy remains an anchor on the company’s earnings. In the company’s most recent earnings report filed in early October, Constellation posted a year-over-year (YOY) earnings per share loss (EPS) of 1.5%.

However, that was completely due to registering a loss from Canopy Growth. Without that factored in, Constellation would have posted YOY EPS growth of approximately 7%. And it’s hard to compare these numbers on a YOY basis. On a sequential basis (i.e. quarter over quarter), the company posted a 20% gain in earnings and a 15% revenue gain.

An End to the Pandemic Would Still Help

The boost that the company may get from cannabis hope will only be a short-term high. Many companies have managed to pull off good quarters during the pandemic based on one-off stories. The major catalyst for Constellation will be a return to live events.

The consumer has done an impressive job of keeping beer, wine, and spirit sales high during the pandemic. However, that will only go so far. For investors to get truly excited, they need the revenue they get from bars, restaurants and live events such as concerts and sporting events.

But that hope is several quarters down the road at best.

Is Constellation Brands a Buy?

Constellation Brands is approaching all-time levels set in 2018. On the one hand that makes sense. Constellation surged in 2018 on the announcement that it was investing in Canopy. With that investment appearing to pay off, investor enthusiasm is understandable. And its price-to-earnings ratio of around 40, is in line with competitors such as Brown-Forman (NYSE:BF.B).

On the other hand, STZ stock is posting a 69 on the Relative Strength Indicator which suggests the stock is approaching overbought territory. Analysts give Constellation a hold and if you do hold the stock, the dividend may make it worth your while. However if you’re looking to open a position on Constellation, you should wait for the stock to come down after it will likely get an earnings bump.