Canopy Growth Corp has lost its lead, GMP says

Following a quarter that came in softer than expected, GMP Securities analyst Ryan Macdonell has cut his price target on Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart, News TSX:WEED)

On Wednesday, Canopy reported its Q1, 2020 results. The company lost $1.28-billion on net revenue of $90.5-million, a topline that was up 249 per cent over the $25.9-million in revenue the company posted in last year’s first quarter.

“The company has two primary objectives as we complete Q1 2020 and look to the remainder of the fiscal year,” CEO Mark Zekulin said. “First, the company remains focused on laying the foundation for dominance in an emerging global opportunity. This means investments in developing intellectual property, building brands, building international reach and ensuring scaled production capability for current and future products. Second, we are fixated on the process of evolving from builders to operators over the remainder of this fiscal year, meaning that as our expansion program comes to a close in Canada, and as new value-add products come to market in Canada, we demonstrate a sustainable, high-margin, profitable Canadian business.

“Fiscal 2020 is going to be another exciting time for the cannabis industry as we close in on the launch of new product formats. Our recent harvests are proof that our focus on operational excellence is working, and we look forward to showing both our Canadian and U.S. customers what we’ve been working on behind the scenes to prepare for the next wave of products coming later this year,” Zekulin added. “Internationally we are now executing on the infrastructure we have spent the last several years building, with just under 1,000 kg or kg equivalents of dried flower, oil and softgel products exported from Canada since April 1, and domestic, commercial production now under way in Germany (C3), Denmark (Spectrum Therapeutics) and the United States (CBD only).”

Price target cut from $65.00 to $45.00

Macdonell notes that WEED’s revenue number came in below both his estimate and the street consensus. As a result of the quarterly miss, the analyst Friday lowered his price target from $65.00 to $45.00 while maintaining his “Buy” rating. He explained the reasoning behind the move.

“We are decreasing our price target as the lacklustre performance in recreational market sales could indicate that Canopy has lost the leading position,” Macdonell said. “We remain positive on WEED over the long-term as we expect the company is well prepared for cannabis 2.0. Our sum-of-the-parts valuation on the pro-forma share count values Acreage at 22x consensus 2021 EBITDA of US$273m for a value of $14.00. Our valuation of Canopy’s legacy operations is $31.00, derived using a DCF calculation with the following: 1) a 7.5% discount rate, 2) a 22% share of the recreational market (28% previously), (3) a 25% EBITDA margin, and (4) a 3.2% terminal growth.”

The analyst thinks WEED will post Adjusted EBITDA of negative $304.8-million on revenue of $616-million in fiscal 2020. He expects those numbers will improve to EBITDA of positive $33.5-million on a topline of $1.15-billion the following year.

Macdonell says there was a bright side to an otherwise disappointing quarter.

“While the Q1 results were disappointing on some metrics, Canopy appears very prepared for the coming launch of cannabis 2.0 products,” he writes. “WEED’s large scale extraction equipment at its Aldergrove site is licensed and it will be operational in Q3. The company is also progressing on its bottling and vape filling lines, with the licence application submitted for the former. This time last year, Canopy was the most prepared for the launch of the REC market in October 2018, in our view, and the December quarter results ultimately showed that WEED generated nearly 3x the recreational sales of its nearest competitor. We expect that history could repeat itself regarding Canopy’s readiness for cannabis 2.0.”

The analyst’s new price target implied a return of 23.6 per cent at the time of publication.