RE:RE:RE:Something doesn't make sense here ! what are we missing ? When to Expect Profits From Canada's Pot Producers -- Barrons.com
Friday, May 8, 2020, 11:18 AM ET
By Bill Alpert
The Covid-19 pandemic brought an initial flurry of stockpiling by consumers, but it has probably hurt the sales of well-known Canadian cannabis producers such as Canopy Growth, Tilray, and Aphria. That leaves Stifel analyst W. Andrew Carter apprehensive about the March quarter results that the industry will soon report...and the June quarter that follows.
"[W]e believe producer shipments will be under pressure," Carter wrote in a note this week. "and we believe category headwinds are likely to cascade suggesting a vicious cycle for the category's overall growth."
While the U.S. cannabis industry has registered steady growth, and already shows signs of recovering from Covid-19's disruption, Canada's market has disappointed the hopes that once made its stocks popular among investors. Tepid demand has left Canadian companies like Cronos Group (ticker: CRON) with inventory write-downs and an inability to even make a positive gross profit -- as Cronos showed in its report Friday on the March quarter.
"A key impediment to investor enthusiasm for this sector has been the lack of evidence supporting sustainable margin potential," wrote Carter, "and we believe the COVID-19 pandemic suggests another headwind for the sector."
The analyst expects a "noisy" quarterly report from Canopy (CGC), his only Buy-rated stock. He has Hold ratings on Aphria (APHA), Cronos, and Tilray (TLRY). Liquidity concerns leave him with Sell ratings on Aurora Cannabis (ACB) and Hexo (HEXO).
Second-wave products like vapes and edibles will be the key to sales growth in Canada, Carter believes. Despite heavy investment in such products, Canopy hasn't rolled them out in much volume. Canopy has lost market share, said the analyst, and he now doesn't expect the company to reach profitability until after its March 2022 fiscal year. But he likes the new management installed by controlling shareholder Constellation Brands (STZ) and looks forward to hearing their plans when Canopy reports on May 29.
Aphria's latest quarter ended in February, and when it disclosed its results in mid-April, it reported sequential growth in shipments of better than 50% for the period. But Aphria noted that shipments had since slowed in the provinces of Ontario and Alberta, so Carter worries that other Canadian firms will report similar developments in the coming weeks.
The Stifel analyst notes that Tilray had targeted this year's last quarter for positive cash flow. But he fears that the pandemic will make that a difficult achievement. Tilray reports on Monday, and Carter predicts negative cash flow of $21 million on March quarter sales of $50 million.
Aurora reports on Thursday, and the analyst expects it to disclose good sales of second-wave products like vapes, chocolates and gummies. But liquidity problems hang over the company, and it is scrambling to cut the costs that he thinks will leave it with substantial losses and the need for dilutive stock sales. Aurora's $1.2 billion enterprise value fails to account for those unhappy prospects, says Carter.
"[M]any public companies have essentially become trapped by lofty valuations dictated by retail [investor] sentiment and burdened by onerous capital structures," the Stifel analyst said.
Write to Bill Alpert at william.alpert@barrons.com
(END) Dow Jones Newswires
May 08, 2020 11:18 ET (15:18 GMT)
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