Canopy Growth Corp. has an unmatched opportunity to dominate the global market for cannabis products with a war chest of more than $5 billion, a high-level management team, and a new and high-tech distribution center, according to GMP Securities.
GMP analyst Martin Landry said he came away from an investor meeting hosted by the company on Tuesday confident that it is ready for the opening of the Canadian recreational weed market, which is scheduled for Oct. 17.
U.S.-listed sharesCGC, +3.45%climbed 2.9% in early trade Wednesday.
“The cannabis industry is increasingly drawing talented individuals, and Canopy is at the top of the food chain,” Landry wrote in a note, reiterating his buy rating on the stock.
The company has brought in senior executives from a logistics background via Amazon.com Inc.AMZN, +2.61%and Walmart Inc.WMT, -0.29% , from a marketing background via Molson CoorsTAP, +0.55%and from a pharmaceutical background via Purdue Pharma.
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“Such high-level talent should help Canopy navigate thought the rapid growth expected to come with the recreational market,” said Landry.
Canopy’s new distribution center is another positive, he said. The company spent $50 million upgrading an 80,000-square-foot industrial building beside its production facility into a center that has automated excise-tax labeling and packing lines and expects to start shipping to the Canadian provinces by mid-September.
Landry reported having toured the company’s Smiths Falls, Ontario, headquarters multiple times, observing that, for the first time, the facility “did not look like a major construction zone.”
“The phase 4 expansion is completed and licensed with plants entering the grow rooms, which should double the company’s capacity at Smiths Falls to 15 tonnes.”
At full capacity the center will have six bottling lines capable of processing 115,000 jars during an eight-hour shift of either dried cannabis or oils and gels.
Landry has a $50 stock-price target for Canopy, which does not include a potential entry to the U.S., where cannabis is still a Schedule 1 drug at the federal level, putting it in the same category as heroin, LSD and ecstasy.
That has meant participants in the U.S. industry are unable to have bank accounts that would be subject to federal supervision and insurance. That has complicated the effort to grow the market, and handed Canada a valuable first-mover advantage.
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If the U.S. were to relax the regulations — an unlikely development under current U.S. Attorney General Jeff Sessions, a longtime cannabis opponent — the market is expected to grow to more than $10 billion in the coming years from about $6 billion now.
“Under a scenario where Canopy captures a 10% share over time,” said Landry, suggesting in the U.S. a revenue potential of $1 billion, “which could add C$10-14 to our valuation,” said Landry.
J.P. Morgan analysts said they were impressed by Canopy’s operations in both the recreational- and medical-cannabis categories and are convinced by the opportunity in beverages, given the large stake that Corona brewer Constellation Brands Inc.STZ, +1.17%has taken in Canopy.
Constellation Brands is the source of that $5 billion war chest, after it increased its stake in Canopy to 38% earlier this month, including warrants that would grow it to more than 50% in the coming years.
“Although [Canopy management is] still working through the challenges surrounding the onset and duration of a cannabis-infused beverage, they feel that the benefits of zero/low calories and limited hangover will drive consumers towards this product and away from beverage alcohol (management specifically highlighted beer/spirits as the two categories most at risk),” analysts led by Andrea Teixeira wrote in a note.
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Canopy declined to provide a timeline for its beverage plans, but Teixeira said she would not be surprised to find a product ready for market when other value-added products come to market in October of 2019.
“Within the medical-cannabis category, the company is focusing the product formulation on the three key areas of pain, sleep and anxiety and is optimistic about how cannabis will fit into these segments going forward, especially given the size of the addressable market,” she wrote.
Of those three, anti-anxiety treatments are expected to become the fastest-growing segment at an estimated 10.1% compound annual growth rate through 2023. J.P. Morgan does not rate Canopy, but has an overweight rating on Constellation Brands.
Overall, cannabis stocks continued to rally on Wednesday, adding to recent gains as investors continued to eye reports that other major beverages companies are looking at stakes in Canadian weed companies. Last week, a report that Smirnoff and Johnnie Walker maker Diageo PLCDEO, +0.66%was in talks with at least three Canadian pot companies with the intent to purchase a stake or initiate a collaboration in one of them triggered a frenzy of buying.
The momentum continued into this week and was bolstered by the first earnings report from Tilray Inc. as a public company. Tilray, a full-service weed company, completed its initial public offering in July and the stock has been on a rampage ever since.
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On Tuesday, the company said it doubled sales in the second quarter, buoyed by strong demand in Canada and sales to other weed companies and international partners.
U.S.-traded shares of Toronto-based Cronos Group Inc. sharesCRON, +10.20%were up 10%, and Toronto-listed shares of Aurora CannabisACB, +5.27%were up 2.1%.
Nevada-based Cannabis Sativa Inc.CBDS, +8.88%was up 7.6%. Colorado-based farmer GrowGeneration Corp. sharesGRWG, +11.64%were up 10%.
U.S.-listed shares of Toronto-based Supreme Cannabis Co.SPRWF, +16.64%were up 17%.
Horizons Marijuana Life Sciences Index ETFHMMJ, +5.54% , which tracks more than 20 cannabis companies in North America and trades on the Toronto Stock Exchange, was up 3.7%.
The S&P 500S, +1.07%was up 0.3% and the Dow Jones Industrial AverageDJIA, +0.31%was up 0.1%.
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