By Ciara Linnane, MarketWatch
Canopy's better-than-expected revenue overshadowed one issue that will weigh in future quarters
Canopy Growth Corp.'s U.S.-listed shares rose Monday, extending gains made Friday after the Canadian cannabis company surprised investors with better-than-expected earnings.
The stock (WEED.T) (WEED.T) was up 1.6% and was outperforming rivals after the company beat revenue estimates in its fiscal third quarter. The Friday report sparked a rally across the sector (had lost steam by Monday as the broader indexes were hit by a warning from Apple Inc ( ) ( the coronavirus that has sickened thousands of people in China would hurt second-quarter earnings.
The Dow Jones Industrial Average was last down 0.7%, while the S&P 500 was down 0.4%.
But not all analysts were bullish on Canopy on Monday, with MKM analyst Bill Kirk highlighting an issue that was overshadowed by Friday's headline numbers: inventory. Since the end of 2017, Canopy has grown 115,000 more kilograms of cannabis than it has sold, he said.
Don't miss:Why Canopy Growth's sales grew as Aurora Cannabis struggled to sell more weed ()
"On an annual basis, the entire Canadian legal market is 180,000kgs (run rate), suggesting Canopy carries >50% of industry wide needs for the year (some may be CBD inventory in U.S.)," Kirk wrote in a note to clients. "Assuming Canopy ceased all growing operations AND maintained current market share, it would take 2.5 years to sell this product in Canada."
Adding to the gloom, Canopy indicated that its current inventory levels may not have peaked, suggesting it has a lot of product that consumers just don't want.
"We expect large write-downs/destruction/price concessions," said Kirk. "Canopy doesn't want to participate in price competition, but to unlock cash from this inventory balance, they may have no choice. Net sales growth is unlikely to accelerate enough to match current production levels, so facility closures are also necessary."
Kirk rates Canopy as neutral and lowered his fair value estimate for the stock to C$21 ($15.84) from C$23.
Read now:Why Canopy Growth's sales grew as Aurora Cannabis struggled to sell more weed ()
Aurora Cannabis shares (ACB.T) (ACB.T) were up 2.7%. The company posted a more than C$1 billion loss last week, although the news was expected after it unveiled an overhaul of management and operations (week earlier.
British Columbia Investment Management purchased 1.2 million Aurora shares in the fourth quarter, according to a filing with the Securities and Exchange Commission, () raising its total by year-end to 1.4 million shares.
Read:From cash to ash: Pot companies have just months to live on average, study finds ()
But the other big licensed producers were lower, led by Cronos (CRON.T), down 1.2%, Aphria (APHA.T) (APHA.T) down 0.9% and Tilray (TLRY) down 0.8%. Organigram (OGI.T) was up 1.7% and Hexo (HEXO.T) (HEXO.T) was down 3.3%.
The ETFMG Alternative Harvest ETF (MJ) was down 0.4%, while the Horizons Marijuana Life Sciences ETF was down 0.7%.
Cannabis Watch: For all of MarketWatch's coverage of cannabis companies:Click here ()
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
February 19, 2020 07:20 ET (12:20 GMT)
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