Canopy Growth Corp has a lot of downside, Echelon Wealth Partners says

As leader of the pack, licensed cannabis producer Canopy Growth Corp (TSX:WEED, NYSE:CGC) may deserve a premium valuation but its current share price is too high even by its own standards, says analyst Russell Stanley of Echelon Wealth Partners.

On Wednesday, Stanley reiterated his “Sell” recommendation with a raised target price of $30.00 per share.

Last week, Canopy reported its fourth quarter and fiscal year 2018 financials, with quarterly revenue of $22.8 million, slightly below the consensus $24.2 million, to go along with a larger than expected EBITDA loss of $22.9 million (consensus was negative $8.4 million).

CEO Bruce Linton stated that Canopy will be ready for the rec cannabis market once it opens on October 17.

“For many months, provincial and territorial agencies have thoroughly evaluated our business, including our product inventory, operational capabilities, IT systems as well as our cannabis retail and education programs,” said Linton in a press release. “Being the only company selected by all provinces and territories with announced supply and retail partners, speaks to our readiness for the adult recreational cannabis market that is expected to open in less than three months.”

Stanley says there are a number of reasons why Canopy deserves a premium valuation multiple, including its partnership with alcohol company Constellation Brands and its success in locking up supply agreements with provincial buyers in advance of the rec market opening,

At the same time, WEED currently trades at an approximate 328 per cent premium to its peer group average, based.

“While we continue to believe WEED deserves a premium given the Company’s market leadership in a number of areas, the stock is now trading at a premium that is high even by its own historical standards, and we are therefore reiterating our rating,” the analyst says in a note to clients.

Stanley has revised his estimates to take into consideration Canopy’s acquisition of the remaining 33 per cent of the BC Tweed facilities and the completion of its $600 million convertible senior note financing last month. He now expects Canopy to generate Adj. EBITDA of negative $3.4 million on revenues of $327.3 million in fiscal 2019 and Adj. EBITDA of $175.1 million on a topline of $875.5 million in fiscal 2020.

The analyst’s 12-month target has risen from $22.00 to $30.00, representing a projected return of negative 22 per cent at the time of publication.