Canopy Growth Corp is moving in the right direction, PI Financial says

Following the company’s third quarter results, PI Financial analyst Jason Zandberg has raised his price target but has lowered his rating on Canopy Growth Corp (Canopy Growth Corp Stock Quote, Chart, News TSX:WEED).

On February 14, Canopy reported its Q3, 2020 results. The company lost $124.2-million on revenue of $135.6-million, a topline that was up 38.8 per cent over the same period last year.

“In Q3 we executed across Canada, in our international markets and in our strategic acquisitions, to drive revenue growth,” said David Klein, chief executive officer. “We have a lot of work to do. We are eager to capitalize on the opportunity to create an unassailable position through a tight focus on the consumer and on critical markets.”

Zandberg said the results were mixed.

“Revenue exceeded our expectations of $110.5M while the EBITDA loss was larger than our estimate of $64.1M,” he said. “The better than expected results were due to the over performance of medical sales and “other” revenue. Kilograms of medical cannabis sold in Q3 were 2,257kg, a yoy increase of 24% – this marks the end of four consecutive quarters of yoy declines. The “other” revenue line item was $33.4M, up 41% or $9.8M due to strong performance of previously acquired Storz & Bickel, This Works (CBD) and Biosteel Sports Nutrition.”

The analyst said he thinks Canopy has enough cash for the foreseeable future.

“Operating expenses declined 14% to $232M as WEED continues to “right-size” its cost structure. We expect further cost cutting including possible layoffs and cultivation facility closures. We are optimistic that these cost reductions will lead to profitability but we must point out that even with WEED’s strong revenue and cost reductions in Q3, cash dropped by $469M. That said, cash balance at the end of Q3 was $2.3B so we do not feel that there will be a cash crunch anytime soon.”

In a research update to clients Friday, Zandberg raised his price target on Canopy Growth Corp from (C) $25.00 to $30.00 a share and changed his rating on the stock from “Buy” to “Neutral”. The analyst’s new price target implied a return of zero as of Friday’s close.

“The rating cut is due to the recent increase in the share price which was greater than our target increase,” he explained. “Our target is 13x our FY21 P/Sales estimate>”

The analyst thinks WEED will post and EBITDA loss of (All Figures Canadian) $257-million on revenue of $226.3-million in fiscal 2019. He expects those numbers will become an EBITDA loss of $396-million on a topline of $423.8-million the following year.

“Management indicated that they believe Q4 revenue will see a modest improvement from these results,” Zandberg concluded. “This positive guidance is a departure from most Canadian cannabis stocks that have called for “flat” growth next quarter. We do see pricing pressures impacted the market as market supply is currently much larger than market demand. Many smaller competitors are beginning to sell inventory at low prices in a desperate attempt to generate cash. These headwinds will likely persist for the first half of calendar 2020.”