Canadian cannabis producer Canopy Growth (NASDAQ:CGC) posted another miserable set of earnings for its fiscal Q3 ended Dec. 2020. Despite the fact that it’s controlled by U.S. liquor conglomerate Constellation Brands (NYSE:STZ), CGC stock owners can probably look forward to more losses and a declining stock price.
CGC stock has been sliding for two months since Feb. 9, when the calendar year-end losses were released. For example, when I wrote about this stock on Feb. 24 CGC stock was at $35.60. As of Monday, April 26, the stock was at $27.30, down 23%. In fact, CGC is now down $24.87 from its recent peak on Feb 10 of $52.17, a drop of 47.6%.
Earnings and FCF Losses
Constellation put in its own management personnel over a year ago. But even with a new CEO and CFO, nothing seems to have changed. The company reported net income losses of 904 million CAD (-$712 million), despite making revenue of 398 million CAD ($318 million).
Moreover, in the first 9 months of its 2020 fiscal year, Canopy Growth bled through 505.9 million CAD ($405 million) in negative free cash flow (FCF). That includes negative 135.4 million ($108.3 million) in negative FCF during its most recent quarter.
The company has now burnt through 3.3 billion CAD ($2.64 billion) in the past two years according to Seeking Alpha, with just 1.593 billion CAD ($1.274 billion) in cash and investments. In other words, if the company keeps on burning through cash at the rate it is going, it will have less than three years left.
Once the cash on hand falls below one year’s expenses, CGC stock will tumble quite dramatically. This is due to the high level of dilution that will result from issuing more shares. This could occur earlier if Canopy still can’t produce positive free cash flow one year from now.
In fact, recently Canopy picked up some more debt. On March 18, Canopy borrowed U.S. $750 million (equivalent to 937.5 million CAD). The interest rate was very high, LIBOR plus 8.50%. That more than doubled the company’s debt to 1.569 billion CAD, and raises cash to 2.53 billion CAD.
What could Canopy have been thinking?
Another Doubtful Acquisition
Three weeks later the company made an almost all-stock acquisition of Supreme Cannabis, another Canadian cannabis and CBD maker. The deal is supposed to be earnings accretive and was done through share issuance.
So why did Canopy need to raise debt prior to this? The deal actually results in 2.5 billion in cash on the balance sheet at the close, the same as my estimate prior to the close.
As Seeking Alpha points out, the price paid was at a huge 66% premium. Moreover, Supreme Cannabis has a huge set of greenhouses, yet Canopy just sold most of its own large-scale greenhouses. In other words, the acquisition does not seem to make much sense.
I suspect Supreme’s U.S. sales of CBD products interests the parent company, Constellation Brands. The analyst points out that this is another in a series of dilutive acquisitions that the company has made which so far have not panned out.
What To Do With CGC Stock
TipRanks.com shows that 13 analysts with reports on CGC stock in the last 3 months have an average price of $35.81. That represents a 31.2% potential gain.
Meanwhile, Marketbeat.com has an average price target of $35.68 from 18 analysts. This is 30% over today’s price. Seeking Alpha reports that the average of 20 analysts’ price targets is $37.47, 37% above the current price.
These price targets are similar to the targets the analysts had about two months ago in my last article. Either the analysts’ haven’t updated their reports or they are not yet reacting to the drop in CGC stock.
Nevertheless, CGC now trades for 23 times the revenue forecast for the year ending March 2021. That seems incredibly high for a company that is still not profitable and still burning through cash.
Analysts do not yet foresee profits before the year ending March 2024, according to Seeking Alpha. That year they forecast 41 cents per share, putting CGC stock on a three-year forward price-to-earnings multiple of 66.8 times. This is simply too high.
Canopy does not deserve its $10.5 billion market capitalization. It will be a good number of years before it reaches profitability.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.