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Constellation Brands 'Extremely Bullish, If Not More' On Pot Investment

Constellation Brands (STZ) on Thursday left open the possibility of selling nonpsychoactive cannabis drinks in the U.S. if lawmakers clear a bill legalizing hemp, and the beer giant said it was "extremely bullish, if not more bullish" on Canopy Growth (CGC) since its $4 billion investment in the Canadian pot producer.

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The remarks came as the House and Senate try to finalize the 2018 Farm Bill, which appeared likely to legalize industrial hemp. They also followed estimate-beating second-quarter earnings from the company, helped by strong beer sales.

Shares rose 5.4% at 222.12 in the stock market today, but had surged as much as 7.1%. Canopy Growth slipped 2%.

The current farm bill being smoothed out would replace the 2014 Farm Bill, which expired on Sept. 30. Industrial hemp is a source for CBD, or cannabidiol, which is often advertised as an anxiety and pain reducer. CBD is also a component of marijuana plants.

During Constellation's conference call, an analyst asked whether the company or Canopy might handle the potential sale of CBD beverages if that bill passed. In response, CEO Rob Sands said: "The answer is both."

He added that Canopy was already one of the world's largest CBD producers. And he said that depending on the final legislation, and whether it allows imports, CBD drinks would be distributed through its sales network to retailers. That element, he said, would be reflected in Constellation's business.

In recent weeks, Coca-Cola (KO) has said it was "closely watching" the growth of CBD as an ingredient in wellness-themed drinks. PepsiCo (PEP) this week said it had "no plans at this point" to pursue CBD drinks but would look "very critically" at the space.

Molson Coors (TAP) in August said its Canadian business would partner with a Canadian cannabis company to test out cannabis-based beverages. Other big alcohol companies say they're watching the cannabis industry closely.

'No Evidence' Of Pot Hurting Beer Sales

The big alcohol companies, in regulatory disclosures, have worried that the high from legal weed might take some allure from the buzz from alcohol. But Sands said he sees "no evidence whatsoever," especially in U.S. states where pot is legal in some form, that marijuana was cannibalizing alcohol.

Meanwhile, the company said it had recognized an "unrealized gain" of $1.3 billion since investing in Canopy Growth last year. Constellation in August agreed to invest nearly $4 billion in Canopy, expanding its ownership to around a third of the marijuana company.

"We continue to be extremely bullish, if not more bullish, since we've announced the deal," Sands said.

He said that Constellation was in "the best position in the world of any company" to take advantage of the growing cannabis market. While the U.S. still federally forbids marijuana, Sands said the investment in Canopy was based solely on the company's presence in Canada and elsewhere.

Constellation Brands Earnings

For the second quarter, Constellation reported earnings per share of $2.87, up 16%. That beat estimates for $2.58. Revenue rose 10% to $2.3 billion, edging past expectations of $2.25 billion.

Beer sales grew 10.5% to $1.63 billion as shipment volume climbed 8.7%. Wine and spirits sales rose 9.3% to $772 million as shipment volume increased 8.8%.

The company raised its full-year EPS outlook to $9.60-$9.75, up from a prior view of $9.40-$9.70, and further above consensus views for $9.26. That outlook, however, does not include the massive investment in Canopy Growth.

Beers like Corona and Corona Premier, a low-calorie beer that was launched earlier this year, helped its results. Sands said he saw no reason "why that momentum should not continue through the remainder of the year." The company said that advertising for Corona Premier will continue during the fall and target the baseball postseason and the football season.

Cronos Group (CRON) fell 4.4%. Tilray (TLRY) lost 7.1% after announcing plans for a $400 million convertible debt offering.

Anheuser-Busch InBev (BUD) dipped 0.6% and Molson Coors edged 3 cents higher.

Majority Control?

The deal Constellation and Canopy announced in August gives Constellation a pile of new warrants that, if exercised, would give Constellation control of a majority of Canopy. Bank of America Merrill Lynch is financing Constellation on the deal. Goldman Sachs (GS) advised the company.

Canopy shareholders approved the deal last month. After the transaction's close, expected by Oct. 31, two Constellation executives and a board member will become directors of Canopy.

Some analysts this summer wondered whether Constellation's stampede into the cannabis sector and marijuana stocks was too much too soon.

SunTrust analyst Bill Chappell said there was "little certainty" in the deal. He said he had no issue with Constellation investing in cannabis. But he said he remained concerned with any company's attempt to define the cannabis market size and "pick the eventual winners."

Chappell said the investment also "shifts investor focus away from STZ's outperforming beer portfolio."

During the call, Sands insisted that the investment in Canopy was an offensive play, not a defensive one. He also said that the company prefers to go on offense before business heads south.

"When it turns bad, turning something around is 900 times harder than it is to play offense from an already very strong position," he said.

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