In February, Piper Sandler analyst Michael Lavery cut Canopy Growth’s (NYSE:CGC) rating from overweight to neutral on valuation concerns. Lavery suggested that CGC stock had gotten ahead of itself at 21x the 2022 sales estimate.
Lavery had a 12-month price target on Canopy stock of $27. He kept his target in place. Now trading below his target, I believe CGC is a strong buy.
CGC Stock Valuation Much More Reasonable
When the analyst lowered his rating on Canopy, it was trading over $52. It’s now half that, trading at 15x 2022 sales estimate of 798.33 million CAD ($650 million). That’s a far more reasonable multiple.
Of course, a fair bit has happened since Lavery’s February cut.
First, the company completed its plan of arrangement that saw it unload its ownership in Canopy Rivers – now operating as RIV Capital (OTCMKTS:CNPOF) – in exchange for 20% of TerrAscend (OTCMKTS:TRSSF), a Toronto-based vertically integrated cannabis company.
I won’t get into the details of the exchange of cash and shares. When Canopy first announced the arrangement with Canopy Rivers in December, it was valued at almost 300 million CAD ($244.4 million).
TerrAscend most recently announced it completed its acquisition of Maryland processor HMS Health for $27.5 million. That continues the company’s inroads into the U.S. market. TerrAscend is now in Pennsylvania, New Jersey, and Maryland.
Secondly, in early March, Canopy launched its CBD-infused sparkling water brand Quatreau into the U.S. market. It is already the top-selling ready-to-drink CBD beverage in Canada. On April 21, the company announced its partnership with Southern Glazer’s Wine & Spirits to distribute its CBD-infused beverages. Southern Glazers is owned by the Glazer family, who control both the Super Bowl champion Tampa Bay Buccaneers and Manchester United (NYSE:MANU).
It pays to have Constellation Brands (NYSE:STZ) as your controlling shareholder.
Lastly, also in April, Canopy Growth announced it would acquire the Supreme Cannabis Company (OTCMKTS:SPRWF) for 435 million CAD ($354.3 million) in a cash-and-stock deal that will see Supreme shareholders get 0.1165872 Canopy shares and 0.0001 CAD ($0.000081) for every share held.
The key to the acquisition was the 7ACRES, a leading Canadian high-end cannabis brand that can produce quality weed at lower costs. Overall, the addition of Supreme gives Canopy almost a 14% share in the Canadian recreational market.
If it’s able to find 30 million CAD ($24.4 million) in cost synergies over the first 24 months post-merger, all the better.
Canopy CEO David Klein continues to build the kind of scale that ultimately should pay significant dividends for its shareholders.
The Bottom Line
BofA Securities analyst Heather Balsky recently reinstated coverage of Canopy with a buy rating and a $36 price target. That’s 41% upside if she’s right.
“In our view, the current stock price does not fully value its long-term potential. We think its balance sheet, mgmt team and partnerships position CGC well to enter the US if there is federal legalization,” Balsky said on April 28.
I realize there’s a big “if” in that statement. However, unless you’ve been living under a rock, it’s more a matter of when not if.
It’s been a while since I last wrote about the company — six months to be exact.
Last November, I said that BioSteel Sports Nutrition was going to become a bigger part of the Canopy story. On April 8, the company announced that Steve Nash, legendary Canadian NBA star and current head coach of the Brooklyn Nets, had signed a multi-year deal to be BioSteel’s newest brand ambassador.
“I only endorse products that I am passionate about,” Nash said in Canopy’s press release. “I’m excited to be working with BioSteel because I have been hydrating with its zero-sugar sports drink on a daily basis for years.”
To think that Canopy paid just $35.8 million for majority control (72%) of BioSteel. It easily could turn out to be the company’s biggest diamond in the rough.
Like Balsky, I see Canopy having too many of the pieces necessary to build a dominant force in cannabis. Trading at 15x its 2022 sales, I think now is an excellent time to get in on the action.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.