Canopy Growth Corp. (WEED:TSX; TWMJF:OTC.MKTS) has seen an improvement in its gross margins, wrote Roth MKM analyst Bill Kirk in a February 12 research note. With production capacity and consumer demand properly balanced, Canopy can now focus on product formats and geographic markets that are the most profitable. In anticipation of potential federal legislative changes related to cannabis in the United States, Canopy plans to hold a shareholder vote in April on a proposed corporate structure for Canopy's U.S. operations. This vote would approve converting a US$100 million promissory note held by Constellation Brands into an equity investment in Canopy's future U.S.
Kirk also shared results from Canopy's third quarter.
Canopy Growth reported CA$78.5 million in total net sales last quarter, beating estimates. Sales grew in most segments, including 9% in Canadian business-to-business, 11% in Canadian medical, and 81% in international medical cannabis. Adjusted losses narrowed from previous quarters after divesting some assets.
"Most impressively, reported and adjusted gross margin of 36% (from 33% in 2Q and 17% ex. BioSteel in 1Q) was the highest level for the company since the 2018 Canadian adult-use legalization," Kirk commented.
Kirk noted that Canopy is nearly at the point of a positively adjusted EBITDA. With US$262 million in cost savings achieved so far, Canopy is on track to meet its US$270-300 million target.
Good Opportunities in The US
Kirk wrote that he believed Canopy would find ample opportunities in the U.S., even though the company has focused more on Canada due to demand, leading to profitability.
"While the balance sheet continues to be an overhang, a shift to a more asset-light model affords extra time for legislative changes to unlock significant value," Kirk said, giving Canopy a Buy rating and CA$9 target price.
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Disclosures for Roth MKM, Canopy Growth Corp., February 12, 2024
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures: The price target and rating history for Canopy Growth Corp prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC. The price target and rating history for Constellation Brands, Inc. prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC. Shares of Canopy Growth Corp may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.
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