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Canopy Growth: BofA Is Bullish before Its Q4 Earnings


May. 26 2020, Published 7:34 a.m. ET

Canopy Growth (NYSE:CGC)(TSE:WEED) is one of the strongest players in the cannabis industry. Notably, Constellation Brands (NYSE:STZ) has also backed the company. Before Canopy Growth’s fourth-quarter earnings, Bank of America Merrill Lynch had some bullish views about the company. The stock rose 6.4% on the NYSE and 8.4% on the Toronto Stock Exchange on May 22 after BofA’s comments. Let’s see what Bank of America had to say about Canopy Growth.

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Bank of America is bullish about Canopy Growth

While other cannabis companies have been struggling to stay afloat, Canopy Growth launched the second wave of Cannabis 2.0 products. To know more, read Canopy Growth: New Cannabis 2.0 Products amid COVID-19. Compared to its peers, Canopy Growth is in a better financial position. Even Bank of America thinks so. On May 22, The Street reported that analysts at Bank of America reinstated coverage with a “buy” rating and a target price of 30 Canadian dollars.

Analyst Bryan Spillane at BofA said, “Overall we are favorable to Canopy’s long-term prospects, as a leading balance sheet [has] allowed Canopy to scale both in Canada and abroad (specifically the US), at a faster clip than peers.” Bank of America has bullish views due to Canopy Growth’s ability to right-size its operations, its 2.2 billion Canadian dollars cash in hand, and strong leadership under CEO David Klein.

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Canopy Growth in the Canadian cannabis market

According to BofA, Canopy Growth is well-positioned to survive in an evolving industry like cannabis despite the slow growth in the cannabis market this year. The growth in the Canadian cannabis industry has been slower than expected. The second wave of legalization in Canada included edibles, beverages, vapes, and concentrates. Looking at the demand for these products, there was hope that the cannabis market could grow in 2020.

However, the COVID-19 pandemic changed the course for the product launch. Also, store roll-out would have picked up in Ontario this year. However, that looks uncertain amid the pandemic. All of these factors could pose a headwind for the Canadian cannabis industry in the short term. CIBC Capital Markets slashed the cannabis sales forecast for 2020 to 2.5 billion Canadian dollars from an earlier estimate of 3.4 billion Canadian dollars. However, the prospects still look good for the cannabis industry.

Research by the Canadian cannabis industry also shows that certain marijuana strains can help fight the coronavirus. These factors could help the industry grow. Read Could Certain Marijuana Strains Help Fight COVID-19? to learn more.

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Canopy Growth has a huge opportunity to expand in the US market with Constellation Brands’ help. The company thinks that cannabis-infused beverages could attract a huge consumer base. More US states legalizing cannabis and the FDA’s leniency with CBD products could help the company. Many states, like California and Texas, have been looking at the cannabis industry to help them recover from economic losses amid the pandemic. However, marijuana legalization is still a long shot in many states. Cannabis demand hasn’t been taking a back seat amid the crisis. Cannabis companies benefit from higher revenues.

Is Canopy Growth a buy?

Canopy Growth stock has a majority “hold” rating. Currently, 11 analysts cover the stock. Among the analysts, three recommend a “strong-buy,” two recommend a “buy,” and six recommend a “hold.” The average target price on the stock is $23.97, which represents an upside potential of 23% from its closing price on May 22. The stock closed 6.4% higher at $19.42 on May 22. Canopy Growth also rose 6.7% and closed at 29.4 Canadian dollars on the Toronto Stock Exchange on Monday.

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In my opinion, Canopy Growth has the potential to be a strong cannabis player this year due to financial backing from Constellation Brands. The company’s expansion plans with Cannabis 2.0 products look good. Also, the company has a strong balance sheet. Canopy Growth will likely report its results for the fourth quarter of fiscal 2020 on May 29 before the market opens. Analysts expect the company to report revenue of 129.0 billion Canadian dollars, which is a slight increase from the third quarter. Also, the EBITDA losses could be lower at 88.2 billion Canadian dollars compared to the third quarter.

Aurora Cannabis (NYSE:ACB), which was on the verge of crashing, started gaining attention after it executed its reverse stock split and reported higher revenue in its recent quarter. Green Thumb Industries (OTCMKTS:GTBIF) also reported higher revenue in the first quarter of fiscal 2020. In May, Canopy Growth stock has gained 27.2%, while Aurora Cannabis and Green Thumb have gained 89.6% and 41.0%, respectively.

Stay with us to learn more about the marijuana sector.


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