Will Canopy’s Bellwether Earnings Beat Drive Cannabis Shares Higher?
Investing.com | Feb 18, 2020 21:37
A renewed wave of optimism swept over the marijuana sector last Friday, after Canopy Growth (NYSE:CGC), (TSX:WEED) reported its most recent quarterly earnings. The release ticked three important boxes: it showed a steady improvement in revenues, demonstrated effective cost-cutting results and posted a smaller-than-expected loss.
In short, the largest cannabis company on the globe did better than analysts had expected. And the market reacted almost instantaneously.
Shares of the Ontario-based pot grower jumped, notching a more than 13% gain on Wall Street and an almost 16% gain on the day on the S&P/TSX Composite.
In addition, early indications are that this upward thrust was not only maintained during after-hours trading but could hang on until the markets reopen today after the long weekend due to Presidents’ Day in the U.S. and the Family Day holiday in Canada. An added bonus: the momentum on Friday was at least strong enough to buoy other industry players.
Shares of Hexo Corp (NYSE:HEXO), (TSX:HEXO), Aphria (NYSE:APHA), (TSX:APHA), Cronos Group (NASDAQ:CRON), (TSX:CRON) and Tilray (NASDAQ:TLRY) all closed higher on Friday, underlining the belief that Canopy continues to command the scope to set the tone for the sector.
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For industry watchers it was almost as if the results gave stakeholders, who had been holding their breath, permission to exhale.
Canopy reported a net revenue of USD $93.38 million (C$123.8 million) in the third quarter, which translated to an adjusted EBITDA of a $69.2 million (C$91.7 million) loss. Analysts polled by Bloomberg had reportedly predicted C$105.4 million in revenue and an adjusted C$110 million loss in earnings before interest, tax, depreciation and amortization. Operating expenses in the three-month period fell 14% from the prior quarter to hit USD $174.8 milllion (C$231.7 million). Canopy’s net loss was USD $93.65 million (C$124.16 million).
The comparatively good results, although a positive sign, do not mean the industry has wrestled its challenges into submission. But how it continues to manage these challenges—which include a whole new category of hurdles to overcome as the roll-out of cannabis-infused beverages and other edibles escalates—will be another reason industry watchers will continue to pay close attention to Canopy.
Afterall, Canopy was the first major pot producer to oust its high-profile CEO, a move that several companies have mirrored with sweeping corporate shake-ups in the past few months.
But after the shake-ups, the realities still have to be dealt with. This latest report contained the first results posted by Canopy’s new CEO, David Klein. The former Constellation Brands (NYSE:STZ) executive, who came from the company that's Canopy’s largest shareholder, made it clear more changes to “right size” the company are on the way. This could signal one area where Canopy might end up following the pack—workforce downsizing.
Several cannabis cultivators on both sides of the Canada-U.S. border have made significant cuts to the number of workers on the payroll since the beginning of 2020 in an attempt to cut costs and bolster their bottom lines. Earlier this month, Edmonton-based Aurora Cannabis (NYSE:ACB), (TSX:ACB) announced it was slashing 500 jobs from its payroll, including about 25% of its head office positions.
The announcement came on the same day as it was revealed the company’s CEO, Terry Booth, would be stepping down. Layoffs were also announced in early February at Tilray. The British Columbia-based company said it would trim about 10% of its workforce to rein in costs.
As for Canopy's Klein, in interviews after reporting the numbers, he made one thing clear: his goal is to map a course to profitability for Canopy. Shares of the company closed at US$22.13 (C$29.98) last Friday.
Will those gains hold? That's what everyone will be looking to see this week.
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