BofA Lowers Price Target & Rating On Canopy Despite Its Strong Cash Position And U.S. Entry Plan...Why?

Year-to-date, Canopy Growth CGC stock lost 68.45%, compared to AdvisorShares Pure Cannabis ETF YOLO that went down 33.94%, and SPDR S&P 500 SPY gaining 21.83%. 

Just last week the Canadian cannabis giant confirmed it is divesting its subsidiary business, C3 Cannabinoid Compound Company GmbH, to Dermapharm Holding SE, a European pharmaceutical company headquartered in Grünwald, Germany. The deal was said to include an upfront payment of €80 million ($90.24 million) upon closing of the transaction plus an earnout payment of up to €42.6 million, upon completing certain milestones. 

At the time, Canopy highlighted the move as part of its current evolution into a CPG-modelled organization and a way of furthering its strategy of driving focus and consistent business across its core markets. 

The Analyst 

BofA’s analyst Lisa K. Lewandowski downgraded Canopy's stock to ‘Underperform’ from ‘Neutral’ and lowered the price target to CA$10 ($7.94) from CA$19. 

The Thesis 

While there’s a long-term potential of the legal global marijuana industry, prompted by potential U.S. Federal legalization and the overall shift in perceptions of cannabis consumption, the Canadian operating environment is challenging, wrote Lewandowski in a Wednesday analyst note. 

The analyst highlighted that Canopy’s cash position of CA$1.97 billion and partnerships with Constellation Brands STZ are a plus.

On the other side, Lewandowski noted that the company “has shown mixed progress on key performance metrics (KPIs), is confronted with a rapidly evolving Canadian market with new entrants taking market share and changing consumer tastes, lackluster industry growth even with new stores opening and limited visibility for profitability. “

Furthermore, while the company recently announced executive management changes in addition to selling its subsidiary business C3 as part of its transformation into a CPG company, the analyst believes that “these efforts will take time to show results.”

In addition, Lewandowski reduced sales forecasts for Q322/FY22/FY23 to CA$131.5 million/CA$541.7 million/CA$659.7 million from previous estimates of CA$152.5 million/CA$577.7 million /CA $722.4 million. The analyst noted BofA is expecting “flattish” year-over-year sales growth for FY22.

Lewandowski said the updated price target for Canopy now compares to peer average (Aurora ACB, Cronos CRON, Tilray TLRY) at 4.8x (previously 8.2x).

“We think a premium is appropriate given Canopy’s cash position and more advanced US entry plan.”

Price Action 

Canopy shares traded 1.86% lower at $9.48 per share at the time of writing Wednesday morning. 

Photo: Courtesy of CRYSTALWEED cannabis on Unsplash