The global cannabis market is growing fast; it is currently valued at about $15 billion dollars and is expected to hit $150 billion by 2025 – a growth factor to 10, in just 6 years. Not many industries can boast that sort of return, and the potentialities of it are attracting established corporate interest in the cannabis companies. Alcohol and tobacco producers, especially, are making moves to enter the cannabis field, as a logical addition to current product lines. Dwelling in such an active market space, cannabis also draws attention from some of Wall Street’s best stock analysts.
In a series of recent research notes, Martin Landry, a five-star analyst with GMP, has taken note of the cannabis’s recreational sector, and expressed his belief that the true future for this industry is in the medical field, supported by the linked factors of increasing numbers of patients, increasing numbers of prescribing doctors, and an expanding extract business giving both patients and doctors more options.
In addition to his holistic view of the cannabis market, Landry also narrows his focus to particular cannabis companies. In recent weeks, he turned his gaze on two Canadian players, Canopy Growth (CGC) and Cronos Group (CRON).
But before we start, as usual, we like to include the analyst’s trackrecord when reporting on new analyst notes. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Martin Landry has a yearly average return of 46% and a 68% success rate. Landry is ranked #15 out of 4496 analysts.
Landry recently attended an invited tour of Canopy’s British Columbia greenhouse facilities, which he described as “running smoothly across all areas of production, trimming, and drying.” In his opinion, those facilities show potential for an annual production of 300 tons of cannabis and extract products.
The BC greenhouses, of course, are only a small part of Canopy’s operations. The company controls over 5.5 million square feet of growing space, with over 4.4 million of that in licensed use. Canopy is currently producing over 10 tons per quarter, and is aiming for peak production, in two to three years, of 500 tons annually, or roughly four times current production. Landry is satisfied that Canopy can achieve this; back to his BC greenhouse tour, he said, “With a number of harvests already under the belt, the ramp up focus is on increasing yields and shortening cycle time. Canopy expects it can achieve an equivalent of over four harvests per year.”
Increased production potential is only one of Canopy’s advantages; the company has been at the center of two acquisition deals in recent months. In the first, announced last summer, Constellation Brands – a giant in the international alcohol industry, and owner of Corona beer – increased its holding in Canopy from 10% to 38% with a US$4 billion investment. The move gives Constellation access to Canopy’s marijuana extracts to use in the production of cannabis infused beverages, while giving Canopy access to Constellation’s international network for beverage production and distribution.
The Constellation investment gave Canopy a windfall of cash, which the cannabis company used in its turn to acquire Acreage Holdings. Acreage, while headquartered in British Columbia, operates major cannabis production and distribution networks in the United States, with a presence in 20 states. The Canopy acquisition deal, worth US$3.4 billion, is unique in that it will not take effect until the US Federal government legalizes cannabis nationwide. To lock it in, Canopy has put down US$300 million.
These two corporate maneuvers have put Canopy – and Constellation, for that matter – in a strong position to take advantage of new markets and expanding sales in the cannabis market.
All in all, Landry gives Canopy stock a Buy rating and target price of C$72, suggesting a 19% upside to the stock, and reflecting his optimism that the company can reach its production goals in the near-term. Canopy’s analyst consensus rating, a ‘Moderate Buy’ based on 7 buys and 4 holds from all of the analysts over the past three months, suggests that Landry is not alone in his upbeat outlook. The stock’s C$76 average price target gives it a 27% potential upside from the C$60 current share price. (See CGC’s price targets and analyst ratings on TipRanks)
Cronos is the fourth-largest cannabis producer in North America, and major competitor of Canopy. The size difference between the two companies, however, is obvious when comparing the recent quarterly production numbers. Cronos reported selling over 1.1 tons of cannabis products – only one-ninth the production of its larger rival.
A larger problem for Cronos, however, lies in processing and packaging. The company has not yet fully developed these systems, and ended the March quarter with over 380 kilograms of finished product sitting in inventory. Landry points out this bottleneck in his review of the company, saying, “Cronos is testing investor patience with a slow production ramp-up and bottlenecks for processing and packaging. We believe these issues will be resolved before the summer which should result in a stronger back half for the company.”
The bottlenecks, and the relatively low production, have impacted share price. CRON shares are down 36% since March. The fall in share price brings up the obvious question, should investors buy this stock on the dip? The decline, and the matter of purchase timing, also drew attention from Landry: “While Cronos’ shares have declined significantly from their 52-week high, we see limited near-term catalysts and investors should await a better entry point.”
Like Canopy, Cronos has recently seen acquisition interest from a major “sin” company. In December, Altria, one of the world’s largest tobacco companies, announced that it is acquiring a 45% stake in Cronos for C$2.4 billion ($1.8 billion in US currency). The move gives Cronos two immediate advantages: an infusion of cash, and more importantly, access to Altria’s know-how in processing and packaging. This acquisition deal underlies Landry’s belief that Cronos can resolve those bottlenecks by year’s end.
For a longer-term advantage, Cronos will also have access to Altria’s sales and distribution network. As the maker of Marlboro cigarettes, Altria’s networks are a considerable asset, with an obvious marketing connection to the cannabis industry. Cronos CEO Mike Gorenstien noted all of these advantages when he said of the Altria deal, “We’re delighted to have officially closed our transaction with Altria and to kick off a relationship we expect to lead to significant growth and value creation. Altria’s investment and the services that Altria will provide to Cronos Group will enhance our financial resources and allow us to expand our product development and commercialization capabilities.”
Bottom line: Landry puts a C$21 price target on CRON, suggesting a modest 4.6% upside to the stock. This goes along with his ‘Hold’ rating on the stock.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Read more on the stocks mentioned: