As one of the leaders of the cannabis sector, Canopy Growth (NYSE:CGC) stock has had its share of ups and downs over the years. Lately, the firm has had a lot more negatives than positives, and much of that pain has been self-inflicted.
As a result,Canopy’s big backer, Constellation Brands, (NYSE:STZ) had a major falling out with Canopy. Constellation seemingly forced out Canopy’s CEO, and has now overhauled its whole management team. Consequently, CGC has reworked its strategy.
In recent months, traders have dumped CGC stock, due to both the lousy marijuana stock environment and Canopy’s particular issues.
It’s not surprising that traders are nervous, given that the firm still doesn’t have a permanent CEO or positive earnings per share at this point. However, give credit where it is due. The company’s new CFO, Mike Lee, is making a solid pitch to the market. Lee, for those unfamiliar, previously worked for beverage companies, including E & J Gallo Winery and Pepsico (NYSE:PEP). Most recently, he served as a senior VP in Constellation’s wine and spirits business, making him a natural pick as Constellation tries to right CGC’s ship.
Lee just took over as acting CFO at the beginning of June. Despite his brief tenure, Lee made a strong argument for sticking with CGC stock earlier this month at the Barclays Consumer Staples conference. Let’s start with his explanation for one of the bears’ biggest concerns about Canopy Growth stock: CGC’s weak profitability and its large operating losses.
Canopy Explains Its Weak Profit Margins
A big bone of contention surrounding CGC stock has been its weak profit margins. Canopy’s gross margin slumped from the 40% range to barely 20% in recent quarters.
Lee said that some folks have not really understood what’s been going on. When Canopy launched, he says, the company had three large growing facilities available. It could either go “pedal to the metal” to get production rolling full blast from day one or take a more measured approach. CGC went for the first option, grabbing a big chunk of the initial market share.
As a result, however, its operations had some serious inefficiencies. Canopy is now reworking its production. But its overhead costs remain high, which makes its whole profit/loss picture look ugly. Once its facilities are reconfigured to a more optimum set-up, however, Lee says that Canopy will get back to 40% gross profit margins. He expects that to occur “in the near future.”
At the moment, he says,CGC is generating gross margins in the mid-to-high 30s range once those extra costs are backed out. And with optimization and a better product mix, its margins will surge back over 40% again, the CFO stated. This metric will be a key test for CGC stock in coming quarters. The new management team has laid out a clear and credible path to improved profitability. Let’s see if it can deliver.
Big Vaping Push
Canopy likes to talk about how Canada is entering the recreation 2.0 stage of the market. That is, the cannabis sector is becoming a much wider playing field as new products such as edibles come online. A big part of Canopy’s strategy revolves around vaping. Unlike its peers, who are marketing third-party products, Canopy has had its team develop in-house capabilities that could be a huge boon for CGC. According to Lee, its new CFO:
“So, we’re coming out with plus or minus 15 SKUs, multiple devices, a variety of price points. And I can’t steal the thunder from announcements coming later this year, but we think that it’s going to be a very competitive portfolio of products that, yes, we think will grow the category, perhaps convert some of the illicit market into the legal market […] so it’s very important.”
Building a proprietary product portfolio is appealing. It results in much higher margins, after all, since the proceeds don’t have to be shared with a middleman. Given its efforts to develop its own vaping products, CGC has a built-in catalyst. Traders can look forward to its forthcoming announcements on vaping later this year.
And, as Lee rightly notes, one issue with the marijuana market in Canada so far is that many people keep buying product through back channels. If Canopy can help spur more people to buy cannabis legally, it would help clear the inventory backlog that has been a thorn in the side of so many marijuana stocks this year.
The Verdict on CGC Stock
InvestorPlace contrubutor Luke Lango recently explained why he is still bullish on the long-run outlook of CGC stock
The big picture here is that you have a cannabis industry that is in the top of the first inning of a multi-year, global growth narrative […] Judging the long-term fate of a cannabis company because they missed sales or earnings estimates last quarter seems … foolish.
I don’t own any CGC stock at this point. I expect the cannabis industry to continue to have challenging months ahead as it struggles with oversupply. But for a long-term investor who is willing to endure potential losses for the time being, Canopy Growth looks like one of the better options.
Constellation is a well-funded backer, and it appears that it’s putting a competent management team in place to run things going forward. Let’s see who takes over as its CEO, but in the meantime, the new CFO is offering a reasonable plan that could pay off well in coming years.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
