The rally in cannabis stocks this week has brought prices back to levels seen before the recent set of earnings, but consensus numbers remain too high given the continued challenges facing the sector, according to MKM analyst Bill Kirk. "Consensus numbers, particularly around profitability, are far too high," Kirk wrote in a note to clients Friday. Consensus on average expects the five biggest Canadian licensed producers in MKM's coverage to grow sales by 82%, but for adjusted operating expenses to rise just 8%. "We think massive revenue growth with hardly any absolute cost growth is very unlikely," said the note. "Yes, there will be P&L leverage as a percent of sales, but absolute costs are going to grow. In this context, we believe Canopy (rated Neutral, C$26.94, $23 fair value) and Aurora's , (Sell, C$4.14, $3 PT) profitability expectations will be the hardest to achieve." Kirk reiterated his expectation that over time, flower and extraction production will become commoditized and profitabiliy will decrease, similar to how other agricultural products perform. U.S. producers have seen the same trend in the first years of their operation with most still unprofitable after three years. "We are already beginning to see the cracks in Canada: Pricing is down, gaps to illicit aren't closing, and consumption per federal license is contracting. To us, this means the future does not have a near-term path to profitability, and consensusexpectations are unrealistic." Cannabis stocks have rallied for the past two sessions after a congressional committee voted in favor of a bill that would lift the U.S. federal ban on cannabis. And while the Senate is unlikely to move on the bill any time soon, the prospect of legalization that would create the biggest cannabis market in the world has drawn investors back into the beaten-down sector. The ETFMG Alternative Harvest ETF has gained 11% in the week-to-date, while the S&P 500 has fallen 0.5%. The ETF remains down 26% in 2019, while the S&P 500 has gained 24%. Read More...
The rally in cannabis stocks this week has brought prices back to levels seen before the recent set of earnings, but consensus numbers remain too high given the continued challenges facing the sector, according to MKM analyst Bill Kirk. “Consensus numbers, particularly around profitability, are far too high,” Kirk wrote in a note to clients Friday. Consensus on average expects the five biggest Canadian licensed producers in MKM’s coverage to grow sales by 82%, but for adjusted operating expenses to rise just 8%. “We think massive revenue growth with hardly any absolute cost growth is very unlikely,” said the note. “Yes, there will be P&L leverage as a percent of sales, but absolute costs are going to grow. In this context, we believe Canopy (rated Neutral, C$26.94, $23 fair value) and Aurora’s , (Sell, C$4.14, $3 PT) profitability expectations will be the hardest to achieve.” Kirk reiterated his expectation that over time, flower and extraction production will become commoditized and profitabiliy will decrease, similar to how other agricultural products perform. U.S. producers have seen the same trend in the first years of their operation with most still unprofitable after three years. “We are already beginning to see the cracks in Canada: Pricing is down, gaps to illicit aren’t closing, and consumption per federal license is contracting. To us, this means the future does not have a near-term path to profitability, and consensusexpectations are unrealistic.” Cannabis stocks have rallied for the past two sessions after a congressional committee voted in favor of a bill that would lift the U.S. federal ban on cannabis. And while the Senate is unlikely to move on the bill any time soon, the prospect of legalization that would create the biggest cannabis market in the world has drawn investors back into the beaten-down sector. The ETFMG Alternative Harvest ETF has gained 11% in the week-to-date, while the S&P 500 has fallen 0.5%. The ETF remains down 26% in 2019, while the S&P 500 has gained 24%.
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