The official promotion of the Constellation Brands (STZ) CFO to the Canopy Growth (CGC) CEO helped the latter’s stock to temporarily pop above $20. The company was positioned for a boost in December from Cannabis 2.0 sales, but the lack of Ontario stores, slow distribution and mounting restrictions by other provinces will cause Canopy Growth to need an alternative plan to improve their financial prospects in the short term.
Ontario Store Headache
New CEO David Klein likely wants to get out of the prediction business and shift into a more normal corporate plan of under promising and over delivering. After CFO Mike Lee famously discussed a business plan based on 40 new Ontario cannabis stores per month in 2020, Mr. Klein will spend a lot of the next few months explaining how the official Alcohol and Gaming Commission of Ontario (AGCO) plans impacts guidance.
AGCO recently announced a plan that will license only 20 new stores per month beginning next April. Canopy Growth had plans for a dried flower supply demand balance mid-2020 based on the province moving forward with up to 40 store per month starting in January. The new plan won’t see Ontario cross 100 cannabis stores until next Summer while the smaller Alberta province already has over 350 stores.
The problem for Canopy Growth is that the company has limited Ontario stores to sell product as the company hits the market with new vapes, edibles and beverages. The new product formats won’t find a home in Quebec either and Alberta appears to have placed a halt on vapes, as well.
Canopy Growth has made a big point to develop proprietary technology for their vape products. The problem facing the company is the most promising Cannabis 2.0 category is quickly running out of provinces allowing vape sales.
Last week, the Alberta Gaming, Liquor and Cannabis agency suspended sales of cannabis vaping devices. The moves leave the industry with nearly 50% of the population blocked from vaping sales with Alberta, Quebec, Newfoundland and Labrador on the sidelines. Throw on British Columbia charging an additional 20% tax on vape products while Ontario lacks cannabis stores to sell vape devices, the whole country appears limited from selling a meaningful part of Cannabis 2.0 products.
Mr. Klein doesn’t officially take over the CEO position until January 14 so investors really have to question how the company is going to be correctly positioned for the Cannabis 2.0 delays while in a leadership void. Canopy Growth needs substantial sales growth or a reorganization to solve massive losses and the delayed rollout of Ontario stores and Cannabis 2.0 sales makes a reorg much more likely.
For the September quarter, Canopy Growth produced a stunning C$156 million EBITDA loss. Analysts have December revenues only returning to the March quarterly level of C$105 million when the company still generated EBITDA losses in excess of C$90 million.
With additional costs for the Cannabis 2.0 rollout, investors will clearly want to question how the company generates a substantial improvement in EBITDA even with revenues crossing back above C$100 million.
According to TipRanks, a company that tracks and measures the performance of analysts, the consensus on Wall Street is that CGC stock is a “hold” for investors. Out of 16 analysts tracked in the last 3 months, 6 are bullish on CGC, while 10 remain sidelined. With a potential upside of 11%, the stock’s consensus target price stands low at $21.31. (See Canopy stock analysis)
The key investor takeaway is that Canopy Growth faces disappointing delays in the rollout of new Ontario cannabis stores and the Cannabis 2.0 rollout already appears a major failure. Investors should avoid the stock near $20 until new CEO David Klein places his official stamp on the company and adjusts market expectations for the continued disappointing financial results likely to persist into mid-2020 now.
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