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Canopy Growth (CGC): What CEO’s Exit Means for the Stock

support@smarteranalyst.com (Ben Mahaney)

In a surprise move, Constellation Brands (STZ) has forced out Bruce Linton from Canopy Growth (CGC). The news has negative ramifications for the June quarter and beyond as Constellation Brands was apparently not happy with the quarterly results that included growing losses.

Bruce Linton Fired

The press release from Canopy Growth suggested that co-CEO Bruce Linton agreed to step down to allow the company to find the next leader of the company. According to Bruce Linton on CNBC, he was fired. The company has placed Mark Zekulin into the sole CEO roll.

The move follows a horrible March report where Constellation Brands openly complained about the huge losses at Canopy Growth. Constellation Brands invested C$5 billion in Canopy Growth last August, but the results haven’t impressed sending the stock down below $40.

Per MarketWatch, CEO William Newlands made this statement on Constellation Brands earnings call:

While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results

Constellation Brands bought a 38% interest at the time of the deal along with additional warrants for C$4.5 billion that if exercised would provide for a controlling interest. Naturally, the global spirits company didn’t make a near C$10 billion commitment in order to watch the capital burned via large operating losses and wild spending on acquisitions.

Ramifications

For FQ4, Canopy Growth reported a massive C$97 million adjusted EBITDA loss, up from C$725 million in the prior quarter. In addition, the company including the CEO talked up a massive flood of new cannabis supply expected to hit the market in the June quarter and beyond. The June quarter harvest was 34,000 kg or roughly double the March quarter.

The initial take on this executive change being announced on July 3 is that the FQ1 results are likely horrible. The expected ramp up in sales from Ontario retail stores isn’t sopping up mounting inventories. Remember, the company has access to detailed financial information following the close of the June quarter last week.

Analysts forecast FQ1 revenues to reach $86 million and jump to $111 million in the September quarter. The suggestion by the firing of the founding CEO is that Canopy Growth misses estimates and reports some very large losses the rest of FY20 before Cannabis 2.0 ramps up next year.

All of these numbers are far below the projections of fired CEO Bruce Linton who proclaimed that Canopy Growth would reach C$1 billion in sales in the next year. Analysts are down at estimates of only $555 million or the equivalent of C$726 million, far below his forecasts even more this executive shuffle.

One should expect that these financial targets are at risk now.

Takeaway

The key investor takeaway is that the market is coming around to signs that the exit of Bruce Linton might lead to more discipline in the sector. Investors should quickly fade this initial rally back above $40.

The cannabis sector is in line for more turmoil in the months and quarters ahead. Canopy Growth will need to rationalize production targets and face market share losses from aggressive competitors. The best option for investors is to wait for the industry shakeout before looking to pickup shares.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

Disclosure: No position.

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