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  1. Home
  2. / Investing
  3. / Stocks

Canopy Growth Slips as Production, Margins Disappoint

While the cannabis company's stock is sliding on its year-end report, at least one analyst sees a long-term buying opportunity.
By KEVIN CURRAN Jun 21, 2019 | 08:56 AM EDT
Stocks quotes in this article: CGC, ACB, STZ

Canopy Growth Corp.  (CGC) is not seeing any green after a mixed earnings report on Friday put forward some disconcerting figures about Canadian production and pot prices.

Shares of the Smiths Falls, Canada-based cannabis company were down around 7% before Friday's opening bell after reporting a significantly larger per-share loss than anticipated for the fiscal fourth quarter as Canopy Growth was stung by shrinking margins and cultivation numbers that came up well short of expectations.

Canopy Growth did report better-than-expected revenus, which rose nearly 200% for the full fiscal year, and CEO Bruce Linton attempted to assuage concerns about the road ahead.

"The fourth quarter wraps up a historic year with major steps taken in Canada to build out our national platform while scaling all of our processes to bring cannabis to market. The third quarter of the year benefited from months of advanced production while the fourth quarter relied more on efficient throughput and a more automated platform," Linton said. "With more product formats coming to the Canadian market later in the year, we are working hard to ensure that we are ready to hit the ground running with products, formats and brands that Canadians trust."

However, the disappointing aspects of the year-end report and the company's attempts to fold in its recently approved acquisition of Acreage Holdings, which is due to impact net income in the current quarter, are holding sway over the shares here on Friday.

"Canopy harvested 14.5 metric tons - this performance is disappointing and trailed the 15.6 metric tons produced by competitor Aurora Cannabis (ACB) ," Stifel analyst W. Andrew Carter said. "In the near term, this is an important metric as a requirement for competing in the current market and positioning for the second wave of product availability later this year. Perfecting the cultivation/processing is necessary for the company's stated objective to either spin out or collateralize the upstream portion of the supply chain."

Canopy Growth also is contending with shrinking margins as the company continues to pursue growth initiatives ahead of expected U.S. legalization and its break into the market for CBD and hemp sales.

"The gross margin percentage decreased during the year from 48% to 22%, largely driven by the continued expansion work on several of our large-scale greenhouse facilities throughout the year, resulting in under-utilization impact in cost of sales," the company's quarterly filing stated. "The impacts of under-utilization continued into Q4, resulting in a gross margin percentage of 16%, which is down from 34% in the corresponding period from the prior year, and 22% in Q3."

But Canopy Growth also indicated in the filing that it expects these facilities "to be fully operational in the months ahead, resulting in a return to normalized operating costs for our cultivation facilities."

"As production ramp-up begins for the next generation of recreational products, there will be costs related to the ramp-up of advanced manufacturing that will impact reported gross margin during the initial start-up phase, but management expects the impact to be less material relative to the size and scale of the revenue related to the new generation of products," the filing stated.

With the backing of beer giant Constellation Brands (STZ) and a strong balance sheet fortified by massive investments from the beverage distributor, some see the dip in Canopy Growth as a key investment opportunity.

"We believe it is important to remain cognizant of the long-term opportunity at hand ($200 billion global category) with Canopy sporting definitive category leadership with the ability to attack all avenues of growth including in the all-important U.S. market," Stifel's Carter said. "We believe that Canopy Growth is best positioned for the variety of scenarios that could take hold in the category over the next few years, and we believe this optionality is necessary for a constructive outlook given the elevated valuations that prevail across the industry."

An earnings call kicks off at 8:30 a.m. ET and is available here. Comments from management could make or break the trend on the day and will be covered extensively for this Stock of the Day on Real Money.

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TAGS: Earnings | Investing | Markets | Stocks | Beverages | Marijuana | United States | Canada | Real Money | Analyst Actions | Cannabis | Stock of the Day

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