Production and Employee Cuts Make CGC Stock Look Really Risky

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Canopy Growth (NYSE:CGC) is the world’s largest cannabis producer by market capitalization, but it’s getting a little smaller in terms of production capacity and employee count. CGC stock is in for a long spring.

Production and Employee Cuts Make CGC Stock Look Really Risky

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Last week, Canopy announced its biggest move since the ouster of its founder and co-CEO last July.

Under a new “production optimization plan,” Canopy is eliminating 500 positions and closing two greenhouses with a combined 3 million square feet of production space. CGC stock slid nearly 26% in the three days after the announcement, hitting lows not seen since 2017.

The last time I wrote about Canopy Growth was in mid-January. At the time the stock had put together a run that saw it gain 21% in under a week, and was approaching the $25 level. However, the streak soon sputtered.

It’s been a drop of 50% since then, definitively answering the question of how long the rally would last. That slump was only made worse by the market reaction to Canopy’s cutbacks.

Canopy Growth’s Production Optimization Plan

On March 4, Canopy Growth announced a “production optimization plan” for Canada. This amounts to the closure of two greenhouses in British Columbia that have been in operation since February 2018. The move reduces CGC’s production capacity by some 3 million square feet. 

Here’s the company’s explanation for why it made the decision to close those greenhouses:

“Nearly 17 months after the creation of the legal adult-use market, the Canadian recreational market has developed slower than anticipated, creating working capital and profitability challenges across the industry. Additionally, federal regulations permitting outdoor cultivation were introduced after the Company made significant investments in greenhouse production. The Company now operates an outdoor production site to allow for more cost-effective cultivation which will play an important role in meeting demand on certain products that rely on cannabis extracts.” 

In addition, CGC has abandoned its plan to add another production greenhouse in Niagara-on-the-Lake. As a result of the closures, approximately 500 positions will be eliminated. Canopy Growth says it expects to take a pre-tax hit of $700 million to $800 million in the quarter ending March 31.

CGC stock closed at $17.75 on March 4 prior to the announcement. It immediately headed down, bottoming out at $13.22 on Monday.

Bottom Line on CGC Stock

Normally, the market reaction would seem clear cut. However, these times are anything but normal. That means the performance of CGC since March 4 can’t necessarily be pinned on the announcement of greenhouse closures and layoffs. 

The problem is there are two other factors at play. The first is the market turmoil caused by fear over the coronavirus from China combined with an oil price war. The two scares resulted in the Dow Jones Industrial Average’s worst day since 2008 on Monday. 

The other issue is cannabis industry-specific. The Cannabis 2.0 boost hoped for in the Canadian recreational marijuana market has yet to materialize. That’s continued the pressure on cannabis stocks that began last spring when it became obvious the Canadian recreational marijuana market was going to seriously underperform expectations.

CGC dropped to $13.22 on Monday for a 26% loss on three days of trading. However, Aurora Cannabis (NYSE:ACB) was down 27.5% over the same three days. That suggest those broader market forces are behind the CGC drop.

Ultimately, the decisive move by Canopy Growth’s new CEO is likely to pay off.

The company will take charges related to the job cuts, but going forward that’s 500 fewer employees on the payroll. And there was no point in maintaining expensive production facilities if the demand wasn’t there.

If needed, the capacity can be ramped up at a lower cost outdoor site instead. It may (or may not, depending on how you read those market tea leaves over the past several days) have hurt CGC stock in the short term, but lower operating costs bring the company a step closer to eventual profitability.

It’s possible that once we’re through the worst of the coronavirus and Canada’s cannabis 2.0 rollout has ramped up, CGC stock price might start moving in the opposite direction. If all goes well, it might even hit the $23.58 average price target set by investment analysts polled by The Wall Street Journal.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/production-employee-cuts-cgc-stock-risky/.

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