Canopy Growth (WEED.TO)(CGC) is selling more pot products consumers actually want to buy, prompting stronger sales to the provinces, according to analysts at BMO Capital Markets who upgraded the company’s stock on Tuesday.
Tamy Chen and Peter Sklar say a shift in investor sentiment may be on the horizon if the Smiths Falls, Ont.-based cannabis producer can deliver “even a modest beat” when the company reports its latest quarterly results.
“We believe there is potential upside to street expectations for the fiscal third quarter of 2020 driven by the company's pivot into a recreational product mix that should now be better aligned with demand,” Chen and Sklar wrote in a research note on Tuesday.
Canopy Growth took a $32.7 million hit in the quarter ending Sept. 30 from product returns and pricing changes. The charges were primarily linked to the weak sales of its oil and soft-gel capsules. The company also recorded a $15.9 million inventory charge in the quarter to “rationalize product assortment” and introduce new retail pricing.
“While we believe the sector experienced some sequential increase in provincial buy-in calendar Q4 2019. We believe value-priced brands experienced stronger sell-in,” Chen and Sklar wrote.
They said Canopy Growth is among the companies offering cheaper cannabis, drawing sales away from pricier products. The value trend has been adopted by several licenced producers as they attempt to divert sales away from the far less expensive illegal market.
“Canopy is not the only LP in our coverage with value-priced products, but we believe the stock at current levels offers a better relative return profile considering that a number of other LPs with value-priced brands will likely continue to be at risk of requiring additional financings,” Chen and Sklar wrote.
“While value-priced products are lower margin, we believe this should be largely offset by further reduction in costs from underutilized assets.”
The pair upgraded Toronto-listed shares of Canopy Growth to “speculative outperform” from “speculative market perform,” and raised their price target to $40 from $25. The stock climbed 8.14 per cent to $30.75 at 10:23 a.m. ET.
Shares have lifted from their lows in mid-November, climbing more than eight per cent year-to-date, even as the company missed its stated launch date for cannabis beverages without a fulsome explanation.
Canopy Growth said it plans to provide an update on its drinks portfolio when it reports third quarter earnings.
Chen and Sklar expect the company to report revenue of $108 million, up from their previous estimate of $102 million.