The beer business is an area that usually remains unaffected by the general ups and downs of the market as people normally stick to their recreational habits. However, recent developments like the legalization of cannabis and the emergence of alcohol-free bars could be a cause for concern for the makers of alcoholic beverages.
New York-based Constellation Brands (NYSE: STZ) sensed the new threat pretty early and decided to face it by acquiring a significant stake in one of the leading pot companies – Canada-based Canopy Growth. Despite hiking its Canopy stake significantly, Constellation doesn’t seem to have achieved what it was looking for.
Interestingly, fellow brewer and maker of the popular Budweiser beer Anheuser-Busch InBev (BUD) took the same route to stay relevant in the changing market, but with a slight variation. The Belgian company last year entered into an R&D partnership with Tilray (TLRY), another cannabis firm based in Canada.
Among the other players, Heineken recently launched a new brand of sparkling water that is infused with cannabis. It is being marketed through the company’s local brand Lagunitas and sold at marijuana dispensaries.
Boon or Bane?
The aggressive investment in Canopy is proving to be a burden for Constellation Brands, which recorded a major loss from the deal in the most recent quarter, as it did in the previous quarters. It lost significant market value on Thursday in the stock-selloff that followed the announcement.
The value of Tilray’s stock more than halved since last year, as it has been the case with most of its peers. Obviously, it is not an encouraging scenario for Anheuser-Busch, which bets on the tie-up to enter the pot market in a big way. However, it is too early to judge the project as it is still in the research stage.
So, is there merit in the concern that people would start switching to cannabis drinks from their regular beer brands? The current trend indicates that such a shift cannot be ruled out and the main reason is the growing health consciousness among consumers, who would prefer drinks with fewer calories.
The mixed outlook issued by Constellation Brands suggests that losses associated with the Canopy deal will continue to weigh on profitability in the near future, which the market is unlikely to appreciate. Though analysts have assigned the stock buy rating, taking a cue from the moderation in value, the underlying risk is quite evident.
Buy or Hold?
In the case of Anheuser-Busch, the consensus buy rating is more relevant as the company’s exposure to the pot market is small. Though the stock is emerging from last year’s multi-year lows, the recovery is sluggish as investors are concerned about the softening sales in the US market. Also, the company’s finances remain under strain due to recent acquisitions. However, Constellation and Anheuser-Busch have improved their positions since last year, which is enough reason to hold on to the stocks.