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Canopy Growth Earnings After Bell 6/20: Key Word Growth

Daniel Laboe

The largest publicly traded cannabis company is releasing its earnings tomorrow after the bell. Canopy Growth CGC has missed both top and bottom line estimates over the past 3 quarters, but somehow the stock has reacted positively on 2 of the 3 releases. CGC analysts are estimating an EPS of -0.17 and revenues of $71 million.

Shareholders are voting today on whether to acquire Acreage Holdings, which could propel CGC one way or the other.

Constellation’s Stake

Constellation Brands STZ increased its stake in Canopy Growth to roughly 40% (from the original 9.9% in 2017) for $4 billion back in August of 2018. Constellation targeted Canopy because of its diverse portfolio of cannabis-based products and scalability that would allow STZ to get its foot in the door in an industry that is expected to take off.

Constellation Brands is the second largest U.S. alcohol company with long-standing distribution and supply chain operations. This partnership is one of the best things that could have happened to Canopy Growth, giving them access to Constellation’s well-established supply chain to quickly scale operations in Canada and in the ability to do so in the U.S. when legislation legalizes marijuana federally.

Constellation and Canopy are working closely to come up with a fast-acting marijuana-infused beverage that provides the consumer with a mild buzz without the calories of beer.

CGC has been on an acquisition frenzy, buying up as many diverse cannabis players as they can to put their stake deep in the cannabis soil. This surge in cash from Constellations increased their acquisition ability with management putting C$1 billion (roughly $750 million US) aside for further purchases in this ripe industry.

Acreage Holdings

Canopy Growth acquired the rights to buy Acreage Holdings ACRGF, back in April, on the contingency that marijuana is federally legalized in the United States. Canopy is now attempting to make this acquisition sooner with shareholders voting on this deal today.

Acreage Holdings is a U.S. cannabis dispensary business operating in 17 states with 2 states pending on acquisitions. Its combination of medical and adult-use products covers 176 million people with its pending acquisitions pushing this number to 185 million, more than half the U.S. population.

Acreage holdings would give Canopy Growth the U.S. marijuana exposure it needs to make a name for its products. This would also considerably increase its ability to scale once weed is federally legalized in the United States.

U.S. Cannabis Industry

A significant portion of the future growth priced into these cannabis stocks is contingent on the U.S. federally legalizing weed. The market for marijuana in Canada is expected to grow at over 77% annually, according to Cannabis Business Plan. The market in the U.S., if legalized, is anticipated to grow even faster. Some Analysts are predicting that it could even surpass the $100 billion U.S. beer industry.

The modern consumer has changed as a generational consumption shift materializes. Millennials are now the largest consuming generation and purchases are becoming increasingly health motivated. A low-calorie marijuana-based beverage or snack could be just what this next generation consumers are looking for as an alternative to alcohol.

The Pot Stocks

Top Canadian cannabis stocks include Canopy Growth, Cronos Group CRON, Aurora Cannabis ACB, and Tilray TLRY. All but TLRY have seen returns north of 50% in 2019, with Canopy Leading the pack at 58% gains.

 

These Canadian marijuana stocks are trading at exceptionally high multiples and beta’s north of 4. Since these firms are yet to turn a consistent profit a useful metric for valuation is forward price-to-sales (P/S). As a group, these stocks are trading around 20x P/S, multitudes higher than the S&P 500’s 3x. This multiple is being propelled by the triple-digit top-line growth figures that are expected from all of these firms in the next 2 years. These upcoming earnings reports will be crucial in deciding whether the extreme valuations are warranted.

Take Away

Canopy Growth and its publicly traded peers are all very high-risk stocks with an exceptionally large payout expected sometime in the future. Canopy is the clear leader in this space with a vastly diversified portfolio of cannabis products along with its STZ partnership and impending Acreage Holdings acquisition. CGC is making all the right moves to continue gaining market share as the market itself proliferates.

Before the U.S. legalization push, another phase of Canadian regulation is expected to open up more streams of revenue for Canopy’s diverse portfolio of cannabis products. Look for this regulation release in October of this year.

Tomorrow’s earnings release is likely to be another crapshoot for CGC but look for management’s guidance on expansion expectations. I would think that the Acreage Holdings deal outcome would have a more significant effect on CGC.

 

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Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
Cronos Group Inc. (CRON) : Free Stock Analysis Report
 
Canopy Growth Corporation (CGC) : Free Stock Analysis Report
 
Tilray, Inc. (TLRY) : Free Stock Analysis Report
 
Aurora Cannabis Inc. (ACB) : Free Stock Analysis Report
 
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