Expect write-downs in the next quarterly report from Canopy Growth (Canopy Growth Stock Quote, Chart, News TSX:WEED), says analyst Jason Zandberg of PI Financial, who on Tuesday sent to clients a preview before Canopy’s fiscal third quarter due on Friday.
Smiths Falls, Ontario’s Canopy Growth had a rough second half to 2019, along with the rest of the pot sector, with the stock dropping 60 per cent between May and the end of December.
The new year hasn’t been much better, with WEED now down a couple of percentage points, as the industry continues to feel the effects of a slower-than-expected rollout of retail sites across the country which led to a glut of supply over the fourth quarter 2019.
A leader in the cannabis space, Canopy has gone through a management change over the past year, with personnel from part-owner and partner Constellation Brands shifting over to WEED.
Late last year, former Constellation CFO David Klein was announced as Canopy’s new CEO, while Constellation director Judy Schmeling has been put in as Chair of the Board and former Constellation exec Jim Sabia has taken on the role of director at Canopy.
Zandberg said the moves were instigated by a desire to right the ship at Canopy, which has had a number of quarters with significant losses over the past year.
“We believe the shift of management was motivated by Constellation’s desire to reduce Canopy’s cost structure, especially with the currently challenging landscape in Canada,” Zandberg wrote in his report.
For Canopy’s upcoming Q3 fiscal 2020, Zandberg is seeing WEED extending its market share in both the recreational and retail ends of the sector with a potential for meaningful international revenue from the company’s C3 and Spectrum lines, as well.
The analyst is calling for revenue up 33 per cent year-over-year and up 44 per cent sequentially to $110.5 million and an EBITDA loss of $64.1 million. (All figures in Canadian dollars excepts where noted otherwise.)
Last week, competitor Aurora Cannabis announced cost-cutting measures, the loss of its CEO, Terry Booth, as well as impairment charges for goodwill as well as intangibles and property, plant and equipment.
Zandberg says we can expect the same from Canopy on Friday.
“As Canopy’s largest competitor, Aurora Cannabis announced large impairments on intangible and property, plant and equipment as well as goodwill, there is a growing fear that Canopy might do the same. We believe this is a reasonable expectation as the fair market values of certain cannabis intangibles and assets have come down significantly. Canopy’s goodwill is currently sitting at 22 per cent of the total assets while its intangibles, and property, plant and equipment is at 25 per cent of the total assets,” wrote Zandberg.
With the update, Zandberg is maintaining his “Buy” rating and US$25.00 price target for WEED, which at press time represented a projected 12-month return of 31 per cent.
Looking further ahead, the analyst thinks that Canopy will end its fiscal 2020 with revenue of $453.8 million and EBITDA of negative $385.5 million.