Canopy Growth (CGC) Earnings After The Bell: How High Can They Go?

Q2 earnings are winding down with only a few exciting names yet to come. The largest publicly traded cannabis company is releasing earnings this evening, and investors need to see some positive results.

Canopy Growth CGC is reporting its June quarter results after the bell today. CGC has recently been a big mover on earnings with an average move of 9.4% over the last 4 earnings (2 up, 2 down).

Analysts are estimating an EPS of (-$0.28) on sales of $86 million. This would represent an EPS decline of 133% year-over-year, but revenue growth of 309%. Canopy has missed on the last 4 EPS estimates and 3 out of the previous 4 revenue projections. CGC share price is driven more by management guidance and marijuana news than it is by surprises on earnings or sales on earnings releases.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Constellation’s Stake” data-reactid=”14″>Constellation’s Stake

Constellation Brand (STZ) increased its stake in Canopy Growth to roughly 40% (from the original 9.9% in 2017) for $4 billion back in August of 2018. Constellation targeted Canopy because of its diverse portfolio of cannabis-based products and scalability that would allow STZ to get its foot in the door in an industry that is going to take off.

Constellation Brands is the second-largest U.S. alcohol company with long-standing distribution and supply chain operations. This partnership is one of the best things that could have happened to Canopy Growth, giving them access to Constellation’s well-established supply chain to quickly scale operations in Canada and in the ability to do so in the U.S. when legislation legalizes marijuana federally.

Constellation and Canopy are working closely to come up with a fast-acting marijuana-infused beverage that provides the consumer with a mild buzz without the calories of beer.

CGC has been on an acquisition frenzy, buying up as many diverse cannabis players as they can to put their stake deep in the cannabis soil. This surge in cash from Constellations increased their acquisition ability with management putting C$1 billion (roughly $750 million USD) aside for further purchases in this ripe industry.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="U.S. Cannabis Industry ” data-reactid=”19″>U.S. Cannabis Industry

A significant portion of the future growth priced into these cannabis stocks is contingent on the U.S. federally legalizing weed. The market for marijuana in Canada is expected to grow at over 77% annually, according to Cannabis Business Plan. The market in the U.S., if legalized, is anticipated to grow even faster. Some analysts are predicting that it could even surpass the $100 billion U.S. beer industry.

The modern consumer has changed as a generational consumption shift materializes. Millennials are now the largest consuming generation, and purchases are becoming increasingly health motivated. A low-calorie marijuana-based beverage or snack could be just what these next-generation consumers are looking for as an alternative to alcohol.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Pot Stocks” data-reactid=”22″>The Pot Stocks

Top Canadian cannabis stocks include Canopy Growth, Cronos Group CRON, Aurora Cannabis ACB, and Tilray TLRY. All the pot stocks saw strong rallies in the in first few months of the year but have retreated quite a bit since. Below you can see how these stocks have traded since the beginning of the year.

These Canadian marijuana stocks are trading at exceptionally high multiples and beta’s north of 3. Since these firms are yet to turn a consistent profit an useful metric for valuation is forward price-to-sales (P/S). CGC is trading at 17x P/S, on the lower end of its 5-year trend, but multitudes higher than the S&P 500’s 3x. This multiple is being propelled by the triple-digit top-line growth figures that are expected over the next 2 years. These upcoming earnings reports will be crucial in deciding whether the extreme valuations are warranted.

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