Canopy Growth Corp’s valuation is just too high, Canaccord Genuity says

While Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:WEED) is the clear industry leader of the cannabis sector, both domestically and internationally, the stock is overvalued, says analyst Neil Maruoka of Canaccord Genuity, who on Sunday reiterated his “Hold” rating and 12-month target price of $26.50.

Canopy Growth was busy last week with a number of new announcements: (1) the receipt of a second cultivation license for two of its greenhouse facilities in BC; (2) the acquisition of Annabis Medical, the largest cannabis company in the Czech Republic; and (3) the securing of a three-year supply agreement with the province of Quebec’s cannabis retailer, SAQ, for 12,000 kg annually.

“We have a strategic growth plan and we’re busy executing for the benefit of our shareholders. The international arms of our business are getting stronger and more numerous and our Canadian platform is rapidly gearing up to support our desire to capture a large portion of the Canadian adult-use market expected this summer,” president Mark Zekulin said in a press release.

The developments further cement WEED’s position at the top of the pot sector, both here in Canada as well as worldwide, says Maruoka, who nonetheless argues that the stock’s valuation is too rich.

“While we continue to believe Canopy may well emerge as the industry leader once the rec market comes on line in Canada, we note that the company currently trades at 23.6x our two-year forward EBITDA forecast, at the high end of larger peers averaging 15.9x EV/EBITDA (2-year fwd),” says the analyst in a client update.

Last week also brought reports from the United States that President Donald Trump and his administration would be backing down from earlier claims that it would enforce its federal marijuana prohibition in states where cannabis has been legalized. That’s good news for Canadian companies with business in the US, but Maruoka claims that his assessment of Canopy will not be impacted by the development.

His analysis of WEED stems from a discounted cash flow model using an unchanged nine per cent WACC and two per cent terminal growth, with the higher-risk rec opportunity valued using a probability-weighted NPT (ten per cent WACC and two per cent terminal growth).

The analyst maintains his “Hold” recommendation, with his $26.50 target representing a negative 11.2 per cent return on investment as of publication date.