Canopy Growth Corp. still has 20% upside, says Echelon Wealth

Echelon Wealth Partners analyst Russell Stanley says the size and speed of Canopy Growth Corp.’s (Canopy Growth Corp. Stock Quote, Chart, News: TSX:WEED, TSE:WEED) operation set it apart from other Canadian publicly traded Licensed Producers. And despite a share price performance that has been nothing less than exceptional, he thinks there is still money to be made as a shareholder of the company.

In a research update to clients Monday, Stanley initiated coverage of Canopy with a “Buy” rating and a one-year price target of $14.00, implying a return of 20 per cent at the time of publication.

The analyst says that in the short time that marijuana companies have been publicly traded, Canopy been either the first or biggest at most every milestone. This is a trend he expects will continue for the forseeable future.

“Canopy was the first licensed producer (LP) of cannabis to be publicly traded, the first to obtain a TSX listing, and the first to complete an acquisition on the scale of its recent purchase of Mettrum Health ($363M in stock and options),” Stanley points out. “The joint company’s currently licensed capacity of 18,100kg (representing annual revenue potential of $145M at $8/gram, ex Bennett Road North), combined with significant expansions underway, positions the Company well to entrench its leadership position in the cannabis market while it is still in its ‘early innings’ of development.”

Stanley says there is still plenty of runway for Canopy to expand. Indeed, he believes the sector is still in its very early days.

“The recent acquisition of Mettrum Health added additional production capacity, and filled the ‘space between’ Canopy’s existing brands with Mettrum’s natural health-and-wellness focus,” he says. “Canopy’s growth strategy includes continued market share expansion in Canada, moving up the value-chain by adding higher value cannabis-based products, and expanding internationally.”

Stanley believes Canopy Growth will post Adjusted EBITDA of negatve $14.2-million on revenue of $40.4-million in fiscal 2017. He expects these numbers will climb to negative EBITDA of $6.0-million on a topline of $130.4-million the following year. Then, in fiscal 2019, the analyst thinks the company will turn EBITDA positive, with EBITDA of $32.0-million on revenue of $278.7-million.

The analyst Monday explained how he arrived at his current valuation for Canopy.

Excluding our estimates, WEED currently trades at approximately 36x EV/EBITDA based on consensus estimates for calendar 2018, and 34x consensus estimates for calendar 2019. Looking beyond that, the number of published estimates is quite limited. While we estimate Canopy’s net cash at $105.9M, we effectively assume that cash will be used to finance the expansions that drive our EBITDA estimates. We therefore use a net debt estimate of $10.8M in our EV/EBITDA valuation. We use an 18x EV/EBITDA multiple, applied to our estimate for calendar 2020, and on that basis, rate WEED a Speculative Buy with a 12-month target price of $14.00/shr. Our target price implies a 31x multiple on our EBITDA estimate for calendar 2019, which is slightly below current consensus.

Stanley cautions that his current estimates do not include the potential upside from acquisitions the company may make. He says an expansion into pharmaceuticals for the medical market, edibles and beverages could “significantly” add to the company’s revenue.