Canopy Growth Corp. keeps buy rating at GMP despite “disappointing” Q2 results

Following second quarter results he describes as disappointing, GMP Securities analyst Martin Landry is maintaining his “Buy” rating on Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart: TSX:WEED).

On Wednesday, Canopy Growth reported its Q2, 2019 results. The company lost $330.61-million on revenue of 23.3-million, a topline that was up 33 per cent over the same period last year.

“With extensive investments over the past year, including most notably in the second quarter, in branding and retail development, our entrance into the retail cannabis market has been a success with our SKU assortment obtaining over 30-per-cent listings market share in multistore physical retail store networks nationwide,” CEO Bruce Linton said. “With substantial product inventories on hand, new product formats coming to market as planned, a captive sales force driving increased demand through physical retail stores and increasing internal and channel efficiencies, we believe based on market conditions today that we will attain significant and sustainable market share of the Canadian recreational market.”

Landry notes that this quarter fell below the street consensus and his more modest expectations. The analyst says that while the company may have gotten ahead of itself it still has advantages few can match.

“Canopy’s target to achieve a 30% share of the recreational market is too aggressive in our view and has led to high expectations amongst investors, explaining the strong stock price movement yesterday,” the analyst explains. “Visibility on revenues and profitability remains extremely limited making forecasting challenging. While WEED’s results have disappointed of late, the company’s outlook remains attractive with $5b of cash to deploy and the industry’s largest production footprint. The recent valuation re-rating suggest that investors have re-calibrated their near-term expectations for the company. Our target is based on a DCF using: 1) an 8% discount rate, 2) a 28% share of the recreational market, a 29% EBITDA margin, and (3) a 3% terminal growth.”

In a research update to clients Thursday, Landry maintained his “Buy” rating and one-year price target of $50.00 on Canopy Growth Corp, implying a return of 10.8 per cent at the time of publication.

Landry thinks WEED will post an Adjusted EBITDA loss of $145.5-million on revenue of $262.8-million in fiscal 2019. He thinks those numbers will improve to EBITDA of positive $150.7-million on a topline of $807.0-million the following year.