Canaccord Genuity cuts target on Canopy Growth Corp. after weak Q4

A softer than expected quarter has Canaccord Genuity analyst Neil Maruoka lowering his price target on Canopy Growth Corp. (TSX:WEED).

On Tuesday, Canopy Growth Corp. reported its fourth quarter and fiscal 2017 results. In the fourth quarter, the company posted an Adjusted EBITDA loss of $5.3-million on revenue of $14.7-million.

“With a patient base that has more than doubled over the past year, to over 58,000, we have scaled up operations in all areas, including cultivation capacity, information technology, quality assurance, fulfilment and customer care,” said CEO Bruce Linton. “The development of Tweed Main Street, our new on-line store, which brings the products of our many leading brands under one roof, delivers a shopping experience that consumers frankly expect. Investment in partnerships and product development have delivered a variety of products to our customers, including most recently softgels, produced under GMP conditions. Developing the playbook that has secured our lead in the Canadian market has been a warm-up exercise for the opportunity that lies ahead. Our expansion into developing medical cannabis markets, with established products and procedures under the Spectrum brand, has begun in Germany and Chile. We will continue to invest in our business, to bring more capacity and more permitted products to more customers in more markets, all with a view to increasing market share and maximizing shareholder return in the long term. We strongly believe that continuing to invest in our industry leadership position, strategically trading off short-term profitability for long-term value, is the right decision for shareholders, patients and our communities.”

Maruoka notes that Canopy’s fourth quarter nearly met his topline expectation of $15.0-million, but the company’s EBITDA loss fell far short of the $600,00 EBITDA gain he had modeled. The analyst says the growth is solid, but the path to profitability for Canopy now seems to be a longer term goal.

“We have adjusted our forecasts for the Q4 reported results,” the analyst says, “Additionally, we have recognized that we have underestimated production costs over coming years and have therefore increased our forecasts over coming years. Because Canopy continues to ramp production ahead of the expected recreational market next year, these higher expenses have an outsized impact on our 2018 forecasts. ”

In a research update to clients Wednesday, Maruoka maintained his “Hold ” rating on Canopy Growth Corp, but cut his one-year price target on the stock from $11.50 to $10.50, implying a return of 31.3 per cent at the time of publication.

With his revised forecast, Maruoka thinks Canopy will post Adjusted EBITDA of $24.9-million on revenue of $131-million in fiscal 2018. He thinks those numbers will improve to EBITDA of $121.3-million on a topline of $464-million the following year.