Can Constellation Brands' Pricey Purchase Pay Off?

We're not anticipating a material change to our $199 fair value estimate for narrow-moat

Shares pulled back by a mid-single-digit percentage on the announcement, and we suspect this reaction was due to concerns around capital allocation, given the lofty premium paid for shares and higher risk inherent to the cannabis space (which is not legal on a federal level in the U.S.) relative to Constellation's core beer and wine portfolio. While we concur that the price paid was excessive, we remain constructive on the longer-term opportunities this investment could yield and appreciate the firm's efforts to be an early mover into this developing category. Further the deal will allow Constellation to nominate four directors to Canopy's seven-member board; we'd expect this increased control to come at a premium. We're reiterating our longer-term outlook for the company, which incorporates around 6% revenue growth and mid-30s operating margin on average over our forecast. While shares are now trading in line with our valuation, we'd suggest investors wait for a wider margin of safety.

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