Big things are happening in the Canadian legal weed industry. With the passage of the Cannabis Act on June 19, and Prime Minister Justin Trudeau setting an official legalization date of Oct. 17, the Canadian weed industry sits less than four months away from a green rush. When adult-use marijuana becomes legal, we could be looking at the addition of $5 billion in annual sales. Rocketing from a few hundred million dollars in legal sales to perhaps more than $5 billion is a pretty easy way to get the full and undivided attention of Wall Street and investors.
Perhaps no company is champing at the bit for the proverbial waving of the green flag in October more than Canopy Growth Corporation (NYSE: CGC). Canopy Growth is the world's largest publicly traded pot stock by market cap, and one of just a very small handful of marijuana stocks to have uplisted from the over-the-counter exchanges to a more reputable exchange in the United States. It recently became the first pot stock to list its shares on the prestigious New York Stock Exchange.
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Breaking down Canopy Growth's fourth-quarter and full-year results
However, last week all eyes were on Canopy Growth for a different reason: the release of its fourth-quarter and full-year operating results. As an industry leader, Canopy tends to set the tone for legal-cannabis companies.
Of course, investors have to understand that there's a lot more to Canopy Growth than just its top- and bottom-line results. The commentary and the announcements in its reports tend to have far more bearing. With this in mind, here are the 10 things you should know about Canopy Growth Corporation's full-year report.
1. Canopy's licensed footprint is growing rapidly
Though this probably goes without saying, the company has seen a very rapid expansion of its licensed growing capacity in British Columbia. Since the year began, Canopy's licensed growing capacity, which is authorized by Health Canada, has more than tripled to 2.4 million square feet. The report notes that another 3.2 million square feet of expansion is underway in the province, although no specific guidance was given about total anticipated annual production once at full capacity.
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2. The company has a diversified inventory in anticipation of October's legalization
According to the report, Canopy has stocked up on as much dried cannabis, cannabis oil, and softgel capsules, which are targeted at medical marijuana patients, as it can prior to the Oct. 17 launch date. Inventory as of March 31 consisted of 15,726 kilograms of dried cannabis, 6,969 liters of cannabis oil, and 356 kilograms of softgel capsules. Though this supply is nowhere near enough to meet expected demand, having one of the largest diversified cannabis inventories should help Canopy Growth secure market share once legalization is official.
3. Revenue won't really begin to pick up until its fiscal second-quarter 2019
This may also go without saying, but investors should be aware that Canopy Growth's sales won't begin taking off until the second quarter of fiscal 2019. You may have noted by this report that it runs on a different fiscal year than most other publicly traded companies. This likely means having to wait until sometime in mid-November before we can get a feel for how well Canopy Growth fared in the post-launch environment.
4. It's secured a number of long-term supply agreements
Sure, most investors might fixate on the company's announced 95% year-over-year increase in sales, but I assure you that the company's multiyear supply agreements are much more impressive. The report notes that Canopy Growth has secured an annual aggregate commitment, spanning five provinces, of just over 25,000 kilograms of cannabis. We may only be talking about somewhere around 5% of the company's peak annual production, but these long-term supply agreements are lucrative and predictable generators of operating cash flow.
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5. Oil sales have been consistent
Likewise, while dried cannabis is the most front-and-center product throughout this legalization process, it's alternative cannabis products, such as oils and extracts, that are liable to be the big margin generators for pot stocks. In the latest quarter, Canopy reported that 23% of its total sales were derived from oils, consistent with the 23% of total sales that oils comprised in the year-ago quarter. Though Wall Street would love to have seen this percentage expand, it's still pretty high relative to its peers.
6. Product development is the next step
The past two years have pretty much been spent expanding production capacity as quickly as the company's balance sheet would allow. Now the company is focusing on its next stage of growth: product development. Canopy's report alludes to significant investments being made in marketing and branding programs, improving business-to-business sales functions, developing retail and education programs, and expanding its product line. Specifically, the company mentions focusing on "ingestibles," or edibles, in the future, assuming they're given the OK by Canada's parliament.
7. Its cash position remains strong...
As you may have rightly guessed, expanding the company's capacity at a breakneck pace, and investing in the next phase of its development, won't be cheap. Thankfully, it ended the quarter with $242.7 million in cash and cash equivalents (322.6 million Canadian dollars), which is more than triple what it had at the end of its previous fiscal year. Raising cash hasn't been an issue for Canopy Growth, and shareholders shouldn't worry about any near- or intermediate-term cash crunches.
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8. ...And it's been even stronger since the fourth quarter ended
But don't think for a moment that this company is complacent while sitting on "only" $242.7 million in cash and cash equivalents. Recently, it also closed on $451.4 million (CA$600 million) in gross proceeds from the sale of convertible debentures. Per the report, the "transaction was significantly oversubscribed."
Even more intriguing is the fact that an affiliate of Constellation Brands acquired CA$200 million of this offering. Constellation Brands already owns a 9.9% equity stake in Canopy, and appears to be angling for a bigger bite.
9. Canopy lost a lot more money in 2018
Though I did say there's much more to this earnings report than Canopy's top and bottom lines, we also can't ignore the fact that the company's net loss ballooned in 2018 to $0.40 per share; in the previous year, it lost only $0.06 per share. The increase is primarily the result of a tripling in its annual operating expenses, with significant increases in its general and administrative costs, sales and marketing expenses, and share-based compensation. Even though legal weed is expected to be a significant long-term moneymaker for Canopy Growth, it's not out of the question that this company could lose money in fiscal 2019.
10. Don't look for this metric in subsequent earnings reports
Finally, Canopy Growth also notes that it doesn't plan to continue reporting one metric, the weighted average cost per gram. Management made this decision because it believes that reporting on milligrams of tetrahydrocannabinol (THC) or cannabidiol (CBD) is more accurate than simply reporting costs based on plant weight. Additionally, management anticipates that other leading indicators will develop over time to more accurately reflect the efficiency of the cannabis production process. For investors, apples-to-apples comparisons between growers could become more difficult.
As for this investor, I'm keeping a close eye on Canopy Growth, but I'm in no way suggesting that it's a buy at these levels. With the supply-and-demand outlook still largely uncertain, I believe investors would benefit by watching closely from the safety of the sidelines.
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