Nine months after “legalization” rolled out across Canada, Miami-based investment banker Ladenburg Thalmann finally got around to initiating coverage of the Canadian cannabis industry. Beginning with just four major marijuana stocks, Ladenburg naturally focused on the biggest and best-known… which is why it’s so curious to see that they managed to commit a faux pas right at the start!
We are speaking of course of Ladenburg’s initiation report on Canopy Growth (CGC). Valued at $12.7 billion, Canopy is far and away the largest Canadian cannabis company by market capitalization. It’s a natural target for an analyst just starting out covering the industry. And yet, no sooner had he set out along the path to covering cannabis, than, Ladenburg analyst Glenn G. Mattson stepped into a pothole. The analyst posits a $50 target price for Canopy Growth stock, and rates it a “buy.”
Sketching out the investment case for Canopy, Mattson began by describing the market opportunity here (“a potential $150 billion industry”). He then proceeded to describe how Canopy Growth is beginning to attack this market, and “on pace to reach a CDN $1 billion annual run rate in revenue by 4Q:F20 (March) mainly as a result of an aggressive pursuit of the Canadian market opportunity.”
All of which sounds fine… until you remember that just last week, analysts at Jefferies sat down with new Canopy Growth CFO Mike Lee, and reported that at that meeting Canopy tried “to distance themselves from the CAD 1bn sales run rate by Q4 this year they have previously communicated.”
We guess that tells you when Mattson began drafting its report on Canopy Growth. Clearly, it was some time before last Thursday…
Fortunately, things improved after that rocky start. Mattson correctly noted that in addition to being the biggest and most aggressive player in this market already, Canopy also “has the most aggressive approach to capturing the U.S. market,” specifically, by making a contingent offer to acquire U.S.-based Acreage Holdings, “one of the largest multi-state operators in the U.S.”
Between its own production and Acreage’s, Mattson argues that if and when legalization is enacted in the U.S., Canopy will immediately be able to deploy “significant scale” to capture market share south of the Canadian border.
Mattson also points out how Canopy is cleverly leveraging the (already legal) status of hemp production in the U.S. to set up “a New York based hemp facility for the production of CBD,” along with “plans to build facilities in 5-7 more states in F2020.” Once cannabis is legalized alongside hemp, he notes, “those facilities could be put to a higher purpose” — i.e. growing and processing more profitable marijuana.
Granted, all of the above has to be characterized as long-term prospects for Canopy — with the length of the term depending upon the alacrity with which the U.S. Congress passes new laws legalizing cannabis. In the nearer term, though, Mattson still sees Canopy “more than” doubling production in Canada sequentially in fiscal Q1 2020, and nearly doubling revenue from $689 million for the full fiscal year 2020, to reach $1.3 billion in fiscal 2021.
It has been a tough period for Canopy investors who saw co-CEO Bruce Linton stepping down. Mattson noted, “Though disruption in the upper management ranks as we have seen with the departure of CEO Bruce Linton earlier this month could be a viewed as a warning sign, we are willing to look past the issue for now. We believe that Mr. Linton helped create a strategically sound asset that is the leader in the space and extremely well positioned in terms of expansion into Europe and potentially into the U.S. We would expect that under major shareholder Constellation Brands’ supervision, Canopy will install a seasoned executive who can capitalize on an already sound foundation.
“For this reason, we are willing to look past potential short term issues and recommend the shares,” the analyst concluded.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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