Canopy Growth (NASDAQ:CGC), the Canadian cannabis company, is controlled by U.S. liquor giant Constellation Brands (NYSE:STZ). That said, STZ stock is a much safer and better investment than CGC stock — with its controlling stake in the cannabis company as well as significant profits from its liquor business. And here’s why.
Constellation Brands is a $43.6 billion market value liquor company that has a sizable investment in the Canadian cannabis industry. And assuming it exercises all its warrants and converts its notes in Canopy Growth, it will control 55% of the company.
Moreover, revenue at Canopy Growth is forecast to rise 42.7% to $639.9 million this year from $448.5 million forecasted for 2020. However, analysts expect profits won’t hit until the year ending March 2024. That is when they expect earnings per share (EPS) of 41 cents, putting CGC stock on a forward price-earnings (P/E) ratio of 85 times.
This is a little expensive for most investors. And that is why buying STZ stock is a much better option. It allows investors to get the best of both worlds. For example, STZ stock trades on a forward P/E of just 20.9 times and also pays a dividend with a yield of 1.35% at today’s price.
Moreover, since Constellation Brands controls Canopy Growth, they can ensure that the company gets profitable sooner than expected. And once Constellation acts to control the company, it will have to consolidate the Canopy Growth revenue and earnings on their own financial statements.
Recent Earnings for Canopy Growth
On Feb. 9, Canopy Growth reported its fiscal third-quarter results. In it, revenue was 153 million CAD, up 23% over last year. However, it still reported losses in adjusted EBITDA and free cash flow. Nevertheless, the losses were lower than last year.
More importantly, the company said that it expects to achieve profitability by the second half of its FY2022. That year runs from April 1, 2021, to March 31, 2022. Therefore, the net income profits could come in the quarter ending December 2021 or March 2022. And this is still basically a year away from today.
Furthermore, Reuters reported that Canopy Growth — the world’s largest pot grower — has performed “aggressive cost-cutting.” In addition, higher demand for its cannabis helped lower the company’s losses.
Canopy Growth also said it expects to generate cash by fiscal 2024 (year ending March 31, 2025). It also expects to become operating cash flow positive by March 31, 2024. But these promises are still more than two and three years away from today. Reuters reported that this helped in “soothing” market worries about its profitability.
For example, Reuters says management has cut its workforce by 29% over the last year and reduced expenses by 200 million CAD annually. That exceeds its quarterly revenue of 152 million CAD this past quarter.
Lastly, cannabis is known to relieve stress, so demand has been rising, according to Reuters. Thus, the company has benefitted from this effect. In addition, Canopy, along with other cannabis firms, hope that Joe Biden’s administration will pass legislation to decriminalize marijuana and related products.
What To Do With CGC Stock
TipRanks.com reports that 12 analysts who have written a target price report on CGC stock in the last 3 months have an average price of $37.68. That represents a 6.2% increase from its current price.
Meanwhile, Marketbeat.com has an average price target of $38.57 from 20 analysts. This is 9.01% above current levels. Seeking Alpha reports that the average of 20 analysts’ price targets is $37.68, just above the current price.
Therefore, it seems obvious that the upside isn’t that great for Canopy Growth. By the company’s own admission it is at least a year away.
That is why I think most investors will be better off making an investment in STZ stock. For example, analysts have an average target of $253.20, or 13.07% above it’s current price tag.
Moreover, STZ stock has a 1.35% dividend yield and a low 21 times forward P/E ratio. In other words, along with a controlling stake in CGC stock, owning STZ shares gives you a value-based investment.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
