Canopy Growth Analysts Lower Price Targets After Q2 Report

Over the last 12 months, Canopy Growth Corp  CGC WEED shares have fallen 55%. The cannabis company reported second-quarter results Thursday, posting net revenue of CA$76.6 million ($84.2 million) and a net loss of CA$374.6 million. 

The Analysts

Bank of America Merrill Lynch’s Christopher Carey reiterated a Neutral rating on Canopy Growth and lowered the price objective from CA$30 to CA$24. 

Cantor Fitzgerald’s Pablo Zuanic reiterated a Neutral rating and lowered the price target  from CA$27 to CA$18.90.

Benchmark’s Mike Hickey maintained a Buy rating and reduced the price target from CA$60 to CA$30.

BofA: 'Canopy Remains In Pole Position' In Cannabis Sector 

The following are some of the key themes that need to be addressed before Canopy's stock stabilizes, Carey said in a Thursday note: 

• Street estimates regarding limited stores should be more realistic.
• While investing in growth is important, the cash burn makes the Street careful until sales catch up.  
• Canopy should keep Street expectations low when planning its production.
• The lack of a new CEO makes investors question the company's accountability. 

“Big picture: we think Canopy remains in pole position on a sector with much secular growth ahead, but remain Neutral until visibility improves. We lowered POs on CGC/YWEED to US$19/C$24 from US$23/C$30 on 7x our CY21e sales (was 10x CY20), a lower multiple reflecting still low visibility.”

Cantor Looks Elsewhere In Cannabis

With the stock down 16% and the group following in sympathy, cannabis stocks in general should have handled expectations better, Zuanic said in a Friday note. 

With companies now writing down inventories and posting big “credits” to sales for provisions, the cannabis stocks lose credibility, the analyst said.

More value can be found elsewhere, he said. 

“Canopy says it is in the best position to benefit from the global opportunity, but so far lags in exports behind TLRY (N) and ACB; has a contingent deal to buy a middle of the pack US MSO, and, yes, it is #1 in Canada rec (not med) with 25% share as per the company.”

The group is likely to recuperate in 2020, and while Canopy is a leader, Zuanic said there are smarter investments to be found in the space. 

“Of course, unless STZ decides to step in and buy them at these levels (tranches A and Bof the warrants have strike prices of C$50.40 and C$76.68); it is odd the CEO search has taken so long.”

Benchmark: Canopy's Results Were Disappointing

Canopy's second-quarter results were disappointing, with sales being negatively affected from a restructuring charge for returns, return provisions and pricing allowances, Hickey in a Friday note.

The growth opportunities on a global and domestic level were not in the company's favor, the analyst said. 

“With the global and domestic cannabis market not achieving the presumed near term growth opportunity for WEED, we suspect investors are now favoring disciplined growth and a path to profitability, of which WEED has not demonstrated.”

The near-term performance trends will get better, Hickey said, adding that Canopy's future canalysts include Cannabis 2.0 and the U.S. CBD market. 

“Our C$30 price target (reduced from C$60) assumes a 5x sales multiple on our 2023 sales estimate of $3.0B, discounted back 3 years.Our valuation methodology implies a FY23 EV of $15B and an EV/EBITDA of 18x.”

Price Action

Canopy shares were down 3.22% at $15.33 at the close Friday. 

Related Links:

Canopy Growth Analysts Parse Q2 Print As Investors Retreat

Analyst: Canopy Growth Looks Greener Than It Did 6 Weeks Ago