As the Canadian cannabis market continues to fail to meet sales projections, the licensed producers (LPs) with the best balance sheets are poised to lead a market rebound. With both Aurora Cannabis and Tilray implementing restructurings, the industry could see a void in certain markets providing opportunities for companies with the ability to fund growth initiatives.
Based on the Aurora restructuring, the company is exiting several international markets along with shifting a focus to a value brand. Along with cutting cultivation goals from close to 700,000 kg to only 150,000 kg, the company plans to strip out over C$60 million in quarterly operating expenses. The disruption from removing so many expenses should leave some voids in the market allowing opportunistic moves by companies with the ability to continue investing.
In a smaller manner, Tilray is cutting 10% of their workforce. The company hasn’t detailed their plans regarding exiting any businesses, but a business the size of Tilray cutting 140 employees will leave an inevitable void. The move will allow a better funded business to capture more market share as the job functions of the exiting employees aren’t fully absorbed within the smaller workforce.
We’ve delved into these three Canadian companies poised to lead a market rebound as other companies restructure and focus on survival:
Aphria remains the best value in the sector combined with having the catalysts of their new facility ramping up production. The stock is down to only $4.20 now offering only a $1.12 billion market valuation.
The company recently reported FQ2 revenues of C$120.6 million along with positive EBITDA. The cannabis business only accounts for C$33.7 million in quarterly revenues, but the business is poised to jump due to the Aphria Diamond facility increasing production capacity to 255,000 kg annually from a previous level of only 115,000 kg.
Aphria forecast revenues reaching C$600 million in FY20 leading to a near C$50 million boost per quarter for the 2H of the year. The big forecast includes adjusted EBITDA in the C$40 million range.
The Canadian cannabis company recently raised C$80 million secured by the new cultivation facility pushing the cash balance to nearly C$500 million at the end of November. In January, Aphria raised another C$100 million from an institutional investor to provide additional capital for international expansion and working capital.
Due to the additional cultivation capacity, Aphria has a major catalyst to boost the company from existing levels. The stock has the better potential for substantial gains on a turnaround due to their leading financial position and low valuation.
The word on the Street rings largely bullish on this cannabis player, with TipRanks analytics demonstrating APHA as a Moderate Buy. Out of 6 analysts tracked in the last 3 months, 4 are bullish on Aphria stock, while 2 remain sidelined. With a return potential of over 60%, the stock's consensus price target stands at $6.83. (See Aphria stock analysis at TipRanks)
Cronos Group (CRON)
Cronos is the one company with the cash balance that hasn’t aggressively spent the balance as of yet. The cannabis company ended the September quarter with a cash balance of $2.0 billion from the investment by Altria Group all the way back in 2018.
Analysts only forecast 2020 revenues reaching $118 million due to the lack of investments in cultivation facilities so far with the focus more on building global operations, CBD products and Cannabis 2.0 products. The company has an asset-light strategy with a focus on buying cannabis derived products from third parties to be branded under Cronos brands. The biggest issue for the stock is the strategy has been light on products.
Investors should see Cronos as the most likely acquirer of beaten down assets, especially any strong cannabis brands that don’t have the capital to remain in business or expand. In this manner, the company is likely to lead the market turnaround via consolidation.
A few timely deals to remove a couple of competitors from the Canadian cannabis market could do wonders for removing capacity and pricing pressure from the sector. Cronos can easily spend $500 million to $1 billion without damaging their capital position and ability to invest in growing the existing businesses while boosting their revenue streams.
Based on the above factors, Wall Street also has high hopes for CRON. As 3 Buy ratings were assigned in the last three months compared to no Holds or Sells, the consensus is a ‘Strong Buy.’ To top it all off, its $10.29 average price target puts the potential twelve-month gain at a whopping 43%. (See Cronos stock analysis at TipRanks)
Canopy Growth (CGC)
The largest valued cannabis stock remains Canopy Growth. The company has the cash and backing from Constellation Brands to lead in any sector rebound.
For the just reported quarter, Canopy generated December revenues of C$123.8 million for 49% growth over last year due to European acquisitions in the CBD space. The company is now double the size of Aurora and, prior to any reorganization, is spending C$150.3 million on operating expenses or at least three times the reduced base of Aurora.
New CEO David Klein discussed some general plans to reorganize the business, but investors shouldn’t expect the scale of the others. Clearly, Canopy needs to cut the C$91.7 million quarterly EBITDA loss in order for the market to have confidence in their sector leadership in the future.
The company can reduce the EBITDA loss via revenue growth and higher margins, but some additional constraints on operating expenses would go a long way to reduce any fears of out of control losses. Canopy has a C$2.3 billion cash balance remaining from the Constellation Brands investment allowing for continued investment in international markets and Cannabis 2.0 products. The large cash balance allows the new CEO to continue investing while shutting some smaller segments not generating strong margins and burning cash.
The biggest issue for the stock is the $8 billion market valuation. The stock trades at 14x FY21 revenue estimates of ~$550 million. The stock will rebound on any cannabis turnaround, but investors shouldn’t expect massive gains due to the large cap status of Canopy.
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Disclosure: No position.