Canopy Growth Corp. stock is soaring but it’s still a buy: GMP

Shares of Canopy Growth Corp. (Canopy Growth Corp Stock Quote, Chart, News: TSX:WEED) have been on fire of late, but GMP Securities analyst Martin Landry says the company is more than filling in the value necessary to recommend it.

In a research update to clients today, Landry maintained his “Buy” rating on Canopy Growth, but raised his one-year price target on the stock from $24.00 to $40.00, implying a return of 17.5 per cent at the time of publication.

Landry says two news items from last week, the receipt of a cannabis production license in Denmark and the decision to go ahead with the conversaion of Tweed BC site 2, mean the company’s capacity could exceeed 400 tons of dried cannabis. This, the analyst says, put the company in a leadership postion on a global basis. The analyst says this gives the company signififcant earnings power.

“Under a scenario where Canopy is able to produce and sell 400 tons of cannabis, we estimate the company could generate up to $800m in EBITDA,” Landry says. “To derive this, we assume an average selling price of $6 per gram (dried and extracts combined) and EBITDA margins of 33%. There remain significant execution risks to achieve this run-rate and several unknowns given the nascent nature of the industry.”

Landry thinks Canopy Growth Corp. will generate EBITDA of negative $17.5-million on revenue of $74.7-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $81.5-million on a topline of $375.6-million the following year.

The analyst explained the reasoning behind his target raise.

“Canopy continues to lead the charge in Canada with sizeable expansion plans in multiple provinces making the company the most geographically diversified in Canada,” he said. “While execution risks still abound given multiple production sites and a rapid pace of growth, we view Canopy as the best positioned LP to make the transition from the medical to the recreational market. Our target is based on a DCF using: 1) a discount rate of 8%, 2) average market share of 25% (24% previously), and EBITDA margin of 31% (29% previously), and (3) terminal growth of 3%.”