Better Buy: Starbucks vs. Constellation Brands

Starbucks (NASDAQ:SBUX) is the king of coffee. Constellation Brands (NASDAQ:CGC) has been a heavy hitter in the alcohol segment. However, the headaches that Constellation Brands have suffered in its attempt to get into the cannabis industry make it a less compelling play. In regard to sheer stock performance, Starbucks has been a much better investment, delivering around 80% over the last three years, compared to Constellation Brands’ negative return of around 5% through that same time frame.

Here’s what’s impacting these two companies right now — and which could be a better buy for you. 

Glass jars of cannabis.

Image source: Getty Images.

Cannabis got in the way of beer

Owner of U.S. distribution for the Corona beer portfolio, along with a significant portfolio of spirits and wine, Constellation has, for the most part, been an alcohol player. The main drag on Constellation’s stock performance has been its investment in Canadian cannabis producer, Canopy Growth (NASDAQ:CGC). Like most of the major Canadian cannabis names, Canopy Growth has struggled with losses. Early in 2020, Constellation increased its position in Canopy Growth to just under 40% ownership.

The Canopy investment caused major issues as the company took on heavy losses in the process of ramping up its production scale. The company’s CEO would eventually leave, and Constellation’s CFO, David Klein, became CEO of Canopy and is working to improve the company’s performance. So far, the stock has struggled to recover from the earnings weakness. In the second quarter of fiscal 2021, Canopy showed diluted earnings per share of $0.17 Canadian dollars, but this didn’t stem from the core business. Operating losses were CA$284 million. These continues to be a drag on Constellation Brands as the company has billions tied up in Canopy.

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Constellation’s fortunes seem largely dependent on righting the ship for Canopy Growth, as it was the source of substantial losses taken last year. This year gave us a better picture. Overall sales were down slightly through the first two fiscal quarters to $2.46 billion compared to $2.57 billion in fiscal 2019, but Constellation hasn’t had to report any big Canopy-related losses from stock. Overall operating income was up 16.5% to $838.7 million. Net income shifted from a loss of $646.4 million to income of $733.2 million.

Even with the improvements, Constellation’s stock has not received the love that Starbucks shares have garnered.

Coffee is loved by all

I used to hold concerns over Starbucks declining trends in operating income, but the company has since improved performance. Through expansion into China, it is adding a new source of big revenue potential, while domestic performance is doing well. The coffee giant’s expansion in China has led to a 7% increase in revenues in the fiscal fourth quarter ended Sept. 27 due to a 14% increase in stores. It is worth noting that comp sales saw weakness both domestically and abroad due to the pandemic.

Cup of coffee on top of beans from an open burlap sack.

Image source: Getty Images.

As the pandemic hopefully subsides, the important area of focus will be whether that comp sales story improves. For the full fiscal year, global comp sales declined by 14%. The average ticket, or average price per transaction, increased by 10%, while the total number of transactions declined by 21%. Before the pandemic, the company was making good progress on the comp sales side. It seems likely that it will return to that trend once things settle down.

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Coffee takes the field

In the end, Starbucks seems to be a business far more in tune with what its consumers demand. The company has a pretty clear mission to increase comp sales in its domestic market while looking to expand aggressively in Asia. In the beginning of December, the company reaffirmed its guidance for fiscal 2021 and emphasized plans for continued expansion. 

Constellation Brands is still trying to figure things out. The company has divested parts of its alcohol business in an attempt to improve efficiency, and it is still facing the task of finding a solution to its troublesome investment in Canopy Growth. Constellation has so much money in that it can no longer reasonably get out. Canopy Growth has to succeed, or it stands to be a perpetual thorn in Constellation Brands’ side.

Stock performance indicates that investors seem much more interested in the rebound in coffee sales, as Starbucks looks to recover from the dreadful punch that 2020 and COVID-19 landed on so many industries and businesses. Starbucks shares are definitely more expensive than Constellation Brands’. The coffee retailer finished its fiscal year with earnings of $0.79 per diluted share, giving the stock a trailing price-to-earnings (P/E) ratio of 138.

The reason the market is giving it a pass is because of the short-term economic shock that induced the slip in earnings. As others have pointed out, looking at the company’s fiscal 2020 as a measurement for valuation would be a bit shortsighted. The story here is more about its investments in improved drive thru, AI for inventory flow, and success in its rewards program. Beyond that, the story is really about how big Starbucks can grow in China.

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When looking at these two companies as investments, it’s hard not to go with the clearer play and see how well Starbucks is doing, all things considered. Constellation, by comparison, has some work to do to balance things out between alcohol and cannabis.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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