Canopy Growth: No More Cash Investment from Constellation

Canopy Growth (NYSE:CGC)(TSE:WEED) has enough cash on hand to survive the financial chaos in the cannabis space. Despite the company’s third-quarter results, Constellation Brands (NYSE:STZ) decided not to increase its investment in CGC. Why did Constellation Brands make this decision?

Constellation’s investment in Canopy Growth

In a recent regulator filing, Constellation Brands said that it thinks Canopy Growth is “adequately capitalized with approximately C$2.3 billion cash and marketable securities on hand as of December 31, 2019.” Recently, Canopy Growth announced in its third-quarter earnings that it has 2.3 billion Canadian dollars in cash. Constellation Brands has warrants with CGC that expire on May 1. The company also holds Tranche A warrants that expire on November 1, 2023. The warrants will decide if Constellation Brands wants to increase its investments in Canopy Growth. In November 2019, as reported by Global News, Constellation Brands wasn’t sure if it wanted to use the warrants.

Previously, I discussed that Constellation Brands’ decision to use the warrants would depend on Canopy Growth’s third-quarter results. Constellation Brands has already booked losses due to Canopy Growth’s declining results in the first two quarters of fiscal 2020. Although the company still believes that cannabis is a booming sector, it has decided to be careful with its investments. Recently, the company announced that it will evaluate exercising the warrants. Constellation Brands doesn’t intend to make any additional cash contributions to Canopy Growth.

Canopy Growth’s Q3 results impact Constellation Brands

Canopy Growth’s results were better than expected because it beat analysts’ revenue estimates. The company reported an EBITDA loss again in the third quarter. However, the losses were lower than expected. The company reported an EBITDA loss of 92 million Canadian dollars compared to 155 million Canadian dollars in the second quarter.

I think that the results could have driven Constellation Brands’ decision not to increase its investments in Canopy Growth. The company booked losses for the third quarter due to Canopy Growth. Currently, Constellation Brands is in a good cash position due to its beer business. However, the company plans to return approximately $4.5 billion in cash to shareholders in the form of share repurchases and dividends from fiscal 2020 to 2022. The company won’t be able to return cash to shareholders if it continues to book losses due to its investment in CGC.

Analysts’ recommendations

Recently, Cowen downgraded Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), and Sundial Growers amid their financial struggles. However, Cowen maintained its “market perform” rating on Cronos Group. Cronos Group announced a delay in its fourth-quarter earnings. However, Cowen maintained an “outperform” rating for Canopy Growth. Cowen also increased the target price for CGC to 35 Canadian dollars from 30 Canadian dollars. The increase could be due to the company’s results this quarter. Other cannabis companies continue to struggle amid the cash crunch.

Meanwhile, MKM analyst Bill Kirk said, “Canopy doesn’t want to participate in price competition, but to unlock cash from this inventory balance, they may have no choice. Net sales growth is unlikely to accelerate enough to match current production levels, so facility closures are also necessary.” As a result, he expects to see “write-downs/destruction/price concessions” in the near future from Canopy Growth.

Yesterday, CGC stock closed with a gain of 1.0%, while Aurora Cannabis stock closed with neither a gain or loss. Constellation Brands stock closed with a loss of 2.2%, while Cronos Group closed with a gain of 1.0%.