Canopy Growth has price target slashed at PI Financial

Canadian licensed producer Canopy Growth (Canopy Growth Stock Quote, Chart, News NYSE:CGC) got a substantial price target cut from PI Financial’s Jason Zandberg this week, as the analyst reviewed the company’s latest quarterly results.

In an update to clients on Thursday, Zandberg kept his “Buy” rating but reduced his one-year price target from $35.00 to $25.00, which represented a projected 12-month return of 19 per cent at the time of publication.

Shares of Canopy Growth fell in trading on Thursday and Friday as the markets reacted to the company’s fiscal second quarter results. Canopy reported net revenue of $76.6 million, up 228.4 per cent year-over-year, and an adjusted EBITDA loss of $155.7 million compared to a loss of $61.9 million a year earlier. Operating cash flow before changes to working capital was at negative $140.6 million versus negative $56.0 million last year.

Management pointed to reduced purchases from the provinces, a slower-than-expected rollout of retail stores and a still-to-come derivatives market as reasons for the challenging times in the pot sector.

“We took the necessary steps to address inventory levels on our oils and softgels; looking beyond this, the fundamentals are strong: our retail store sales are growing on an overall and same-store basis, our Canadian medical revenues are up, and international medical sales are growing on both an organic and inorganic basis,” said CEO Mark Zekulin in a press release.

“And, even though revenue is muted during the quarter due to the restructuring charge, actual cannabis shipments grew quarter-over-quarter, which is a great accomplishment in light of the inventory reset that’s occurring at the provinces,” he wrote.

Zandberg says the glaring details in the quarter were the $32.7-million restructuring charge against revenue and a $15.9-million charge included in cost of sales. The analyst says the hits were surprising considering that Canopy had taken an $8.0-million charge in the previous quarter.

The look ahead seems iffy, as well, Zandberg said.

“A surprising aspect of these results was the fact that management backed off of guidance it provided just a few months earlier. Further guidance was not provided other than assurances that no further charges are expected but this statement was caveated by a condition that Ontario must open 40 stores per month commencing in January (an aggressive assumption in our opinion),” said Zandberg.

On the brighter side, the analyst pointed to Canopy’s retail sales which were up 23 per cent from the previous quarter to $13.1 million, while its international medical revenue was up 72 per cent from fiscal Q1 to $18.0 million. Weaker items in the results included sales of pre-rolls which were down 20 per cent from the previous quarter and recreational oils sales which were down 59 per cent.

Zandberg says his target cut stems from a reduction in EBITDA estimates, with the analyst now calling for fiscal 2020 revenue and EBITDA of $453.8 million and negative $385.5 million, respectively, (previously $597.5 million and negative $230.2 million, respectively).

For fiscal 2021, he is expecting revenue and EBITDA of $833.0 million and negative $31.3 million, respectively.