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Feb 14, 2019

Canopy expected to capture biggest share of Canadian pot market

What to expect from Canopy's Q3 earnings

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Canopy Growth Corp. (WEED.TO) probably outsold all its competitors in the first two and a half months of recreational pot sales in Canada, analysts say, establishing a dominant position as it begins to expand into the U.S. hemp market.

The largest cannabis company by market value reports earnings post-market Thursday for the quarter ended Dec. 31, marking the second set of results from a major pot producer that will show nearly a full quarter of legalization.

Canopy likely captured more than 30 per cent of Canada’s recreational pot market in its fiscal third quarter, according to Canaccord Genuity analyst Matt Bottomley, who rates Canopy a speculative buy with a $50 price target. And its sales have plenty of room to grow, as “adult-use sales are likely running at only a fraction of their future potential at maturity,” he wrote in a note published Feb. 8.

Bottomley expects Canopy to report net revenue of $73 million, a 42 per cent gross margin and a $44 million loss before interest, taxes, depreciation and amortization. That would compare to revenue of $23 million, gross margin of 28 per cent and a loss of $58 million in the prior quarter.

Cowen analyst Vivien Azer has been tracking Canada’s recreational pot sales since legalization on Oct. 17, and said Canopy appears to have the highest number of items available for sale and the leading share of in-stock products. There appears to be a “disproportionate availability of low-quality product, which provides even stronger provincial demand for higher-quality products” such as those from Canopy, said Azer, who expects the company to report revenue of $83 million. She gives Canopy an outperform rating and an $82 price target.

Investors will be listening closely to Canopy’s analyst call for information on additional investments into the U.S. and international markets and potential M&A targets, said Eight Capital analyst Graeme Kreindler. Canopy said last month that it will spend up to US$150 million to build a hemp processing and production facility in New York state.

Kreindler, who rates Canopy a buy with a $100 price target, also expects the company to capture approximately 30 per cent of Canada’s recreational pot market.

Canopy’s earnings follow results from Aurora Cannabis Inc. earlier this week. Aurora’s gross margin tumbled 16 percentage points in the quarter amid higher production costs and lower average selling prices. This is likely to be a common theme over the next few quarters, as pot producers spend heavily to ramp up growing facilities and face lower prices in the consumer market.

Just the Numbers

ESTIMATES

-3Q adjusted loss per share estimate $0.16 (range -$0.03 to -$0.37)

-3Q revenue estimate $78.7m (range $69.3m to $89.4m)

-3Q adjusted Ebitda loss estimate $45m (range - $39.3m to - $50.6m)

-3Q gross margin estimate 41% (range 30% to 51%)

DATA

-Canopy has 10 buys, 1 hold, 1 sell: Bloomberg data Average price target $67 (9% upside from current price)

-Shares fell after 9 of prior 12 earnings announcements

-Shares up 130% in past year vs SPTSX Index up 2.8%

TIMING

-Earnings release expected Feb. 14 after market close

-Call 8:30am (Toronto time) Feb. 15

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.