Canopy Growth Corp is upgraded to “Buy” at GMP Securities

The new deal for US cannabis company Acreage Holdings has Martin Landry of GMP Securities thinking differently about Canopy Growth (Canopy Growth Stock Quote, Chart TSX:WEED). On Monday, Landry changed his rating from “Hold” to “Buy” while upping his target price from $65.00 to $72.00.

Last week, Canadian licensed producer Canopy Growth announced a deal to buy Acreage for US$3.4 billion if and when cannabis becomes federally legal in the United States. The deal, which includes an up-front payment of US$300 million, would ultimately see Acreage shareholders receiving 0.5818 shares of Canopy for each Acreage share, amounting to a 41.7-per-cent premium over ACRG’s 30-day VWAP ending April 16.

Landry views the deal positively, saying: (a) that it would ultimately give Canopy exposure to the world’s largest cannabis market; (b) that the takeout multiple is actually low given the strategic nature of the acquisition and potential for growth on Acreage’s part; and (c) that the deal presents significant near-term synergies for Canopy, as it sees Canopy entering a licensing agreement whereby Acreage will have access to Canopy’s brands and IP.

Notably, Landry says there is a “high likelihood” that federal legalization will occur sometime before the 90-month expiry clause of the deal kicks in, and thus, he is reflecting the Acreage acquisition into his valuation of Canopy but, at this point, not in his forecasts.

“The potential acquisition of Acreage significantly changes Canopy’s outlook by giving it scale in the largest cannabis market in the world. While Acreage may not have been a darling stock, being down from its RTO financing, we believe it has the footprint and scale needed to be a sizeable player in the US market,” says Landry in an equity research update to clients.

The analyst thinks Canopy will generate 2019 revenue and EBITDA of $239 million and negative $216.6 million and 2020 revenue and EBITDA of $799 million and negative $51.8 million. His $72.00 target represents a projected return of 20.7 per cent at the time of publication.