Can Canopy Beat Q2 Estimates and Boost the Sector?

This week is important for the cannabis sector, as Canopy Growth (WEED) and Aurora Cannabis (ACB) are both set to report their earnings results on November 14. Both companies are market leaders in the sector, and their strong performances could drive the sector up.

Recently, the cannabis sector has been going through a rough patch. The Horizons Marijuana Life Sciences Index ETF (HMMJ) has fallen 21.5% this year as of November 8. Meanwhile, the S&P 500 Index has risen 23.4% during the same period. One of the main drivers of the cannabis sector’s underperformance has been higher-than-expected operating losses.

Last week, when asked about Aurora Cannabis (ACB), Mad Money host Jim Cramer stated, “The group is just under heavy pressure, and every time it sticks it’s head up it gets completely whacked. They’re playing whack-a-mole with these. We’ve got to wait to until one of them shows a really big profit,” as reported by CNBC.

Let’s look at analysts’ expectations from Canopy Growth’s earnings in the second quarter of fiscal 2020.

Canopy Growth’s revenue to rise

For the second quarter, analysts expect Canopy Growth (CGC) (WEED) to report revenue of 109.5 million Canadian dollars, a year-over-year rise of 369.3% from 233.3 million Canadian dollars in the second quarter of fiscal 2019. Sequentially, analysts’ revenue estimates represent a rise of 21.0%. We expect growth in both medical and recreational cannabis sales to drive the company’s revenue. However, pricing pressures and a slower rate of new store openings could negatively affect the company’s revenue growth during the quarter.

Canopy Growth’s EBITDA to improve

Compared to the first quarter, analysts expect Canopy Growth’s EBITDA to improve in the second quarter. For the quarter, analysts expect Canopy Growth to report EBITDA of -91.76 million Canadian dollars, an improvement from -92.1 million in the first quarter of fiscal 2020. Analysts expect revenue growth to drive the company’s EBITDA. However, they also expect an increase in the cost of sales and higher SG&A (selling, general, and administrative) expenses to offset some of the gains. We expect the company’s investment in the development of cannabis-derivative products could have prompted analysts to raise their SG&A costs in the second quarter.

Analysts’ recommendations

Since the beginning of last month, CIBC, Jefferies, Cowen and Company, and MKM Partners have all lowered their price targets on Canopy. CIBC lowered its price target from 50 Canadian dollars to 45 Canadian dollars. Jefferies cut its target by 68% to 25 Canadian dollars. Cowen also decreased its target by 20% to 40 Canadian dollars. On November 11, MKM Partners cut its target from 33 Canadian dollars to 30 Canadian dollars.

Analysts have given Canopy a consensus price target of 44.49 Canadian dollars, which implies a 12-month return potential of 57.1%. As of November 8, 21 analysts cover Canopy Growth. Of these analysts, 47.6% favor “buy” ratings, while 47.6% are advocating “hold” ratings, and 4.8% are supporting “sell” ratings.

Let’s look at analysts’ recommendations for Canopy’s peers.

  • On November 8, 17 analysts covered Aurora Cannabis (ACB). Of these, 41.2% gave it “buy” ratings. For the stock, the consensus PT stands at 7.68 Canadian dollars, which implies a 12-month return potential of 52.7%.
  • Analysts are bullish on Aphria (APAH). 76.9% of the 13 analysts that cover the stock have given it “buy” ratings. Analysts have given the stock an average 12-month price target of 12.76 Canadian dollars, which implies a potential return of 89.3%.
  • Of the 12 analysts that follow Cronos Group (CRON), 58.3% are in favor of a “hold” rating. Analysts have given the stock a 12-month price target of 15.85 Canadian dollars, which implies a potential return of 40.7%.

Stock performance

This year, Canopy Growth has lost 22.6% of its stock value as of November 8. Its weaker-than-expected first-quarter performance, analysts’ downgrades, and weakness in the cannabis sector appear to have dragged its stock down. However, the surge of 12.7% in its stock price on November 8 offset some of the decline. On November 7, the company announced that it would be partnering with Drake to form a joint venture called More Life Growth Company. For more, read Why Canopy Growth Is Partnering with Drake. Meanwhile, Canopy’s peers Aurora Cannabis, Aphria, and Cronos Group have fallen 25.8%, 14.1%, and 21.7% YTD, respectively.

For a look at analysts’ expectations of Aurora’s first-quarter earnings, read Aurora Cannabis’s Revenue: Here’s What Analysts Expect. Also check out 420 Investor Daily for more cannabis-related updates.