Canopy Growth stock upgraded to buy: ‘The horse is finally ahead of the cart,’ says MKM analyst

Kirk is not expecting much of a beat from the company’s fiscal fourth-quarter earnings scheduled for release on June 1, after rival Aurora Cannabis Inc. ACB ACB, +6.00% posted a wider-than-expected loss and 37% sequential decline in revenue. However, “we believe sentiment is so low as to render risk/reward very favorable,” the analyst wrote in a note to clients.

In the fourth quarter of fiscal 2020, Canopy CGC, +6.48% WEED, +5.20% estimated it lost C$20 million in sales because of fulfillment and product issues, and cited fill rates of just 56%.

“We believe fill rates are now consistently over 90%, leading to [year-over-year] share gains and recaptured sales,” said Kirk. “Further, we believe U.S. legislative potential is no longer reflected in Canopy valuation, leaving upside should there be any progress from Senator Schumer or the Republican-sponsored bill.”

Schumer, the New York Democrat and Senate Majority Leader, has pledged to prioritize cannabis reforms in the current Congress.

Even without expected reforms to strict U.S. laws that continue to classify cannabis as a Schedule I drug alongside heroin, the sales narrative is likely to shift toward CBD sales in the U.S., where Canopy’s collaboration with home guru Martha Stewart is gaining traction.

The company launched Stewart’s product line in fall of 2020, offering gummies, softgels, and oil drops with flavor profiles inspired by her most popular recipes. That line was followed earlier in 2021 with a line of CBD products for pets. 

Canopy is also gaining ground in promoting BioSteel products, the sports nutrition brand acquired in 2019. BioSteel is now being distributed through Constellation Brands Inc.’s STZ, +0.62% Gold Network, said Kirk. Constellation is Canopy’s biggest shareholder after investing $4 billion in the company in 2018.

“We expect large BioSteel distribution gains on the back of Beer distributors’ c-store dominance, and also believe investors are underestimating recent CBD distribution deals with Southern Glazer’s Wine & Spirits (Quatreau and Martha Stewart),” said the analyst. “Southern offers Canopy a singular, national relationship, a huge advantage in a dynamic regulatory environment.”

Kirk is expecting Canopy’s fourth-quarter sales to come to C$155 million, slightly ahead of the C$153 million consensus. Analysts polled by FactSet are forecasting a loss of 25 cents a share.

“We believe downside to the quarter and the share price is limited, given the consensus negative market expectations and share price performance over
the last 3 months,” he said.

Canopy is one of few Canadian licensed producers with a clear path to the U.S. market, he said. Canopy has a takeover agreement with multi-state operator Acreage Holdings Inc. ACRHF, 4.32% that will be triggered if the U.S. law changes, giving it an instant foothold in the U.S.

“We continue to believe that the U.S. is ultimately the best opportunity, but Canopy’s position in Canada is improving,” said Kirk. “The timing of U.S. THC
is uncertain, but is worth more than all other markets combined.”

Canopy shares were last up 6%, but are down 2.3% in the year to date, while the Cannabis ETF THCX, +1.85% has gained 32% and the S&P 500 SPX, -0.21% has gained 12%.