Additional Analysis on Canopy Growth’s Q3 2024 Earnings

The TDR Three Key Takeaways:

  1. US Expansion Strategy: Canopy Growth plans to enter the US market, with shareholder details pending a special resolution expected before April 12, 2024.
  2. Financial Stability and Risks: Canopy maintains a strong cash position, but needs to improve earnings to avoid bankruptcy risk. The company’s financial transparency is high, yet the absence of recent insider stock purchases suggests cautious sentiment.
  3. Stock Potential: Despite no recent insider buying and a current low stock price, analysts see potential growth for Canopy, contingent on exceeding performance expectations.

Our readers requested further analysis of Canopy Q3 2024 earnings, released last week. This follows our initial report on their earnings and the first interview and second interview with David Klein, CEO of Canopy Growth, on The Dales Report YouTube channel.

Here are some the answers to some questions that were submitted by our readers:

Please clarify and share everything about Canopy’s decision and business plan to enter the USA, how will shareholders in the Canadian entity benefit?

We have not received the special resolution yet, which is common. Canadian law mandates public companies to distribute the special resolution 21 to 50 days before the meeting, usually about 30 days prior. The special meeting is scheduled for April 12, 2024, and shareholders are expected to receive this material in the first one or two weeks of March 2024. We will provide an overview once we receive the document. This information is based on Canopy press release dated February 9, 2024.

Why are Insiders not buying Canopy shares in the open market with the stock being so cheap?

As of today, we have confirmed that there have been no reported insider purchases since September 2023. The Officer Sentiment Score, based on insider activities, ranks above the median when compared to a universe of 11,950 companies. Canopy insiders currently rank 5,189 out of 11,950, indicating their activity over the last few years is considered average or at the median. The reason for this score is the absence of significant insider selling, which balances things out.

Are the cash and current assets significant enough to enable the company to reach a cash flow positive state?

Canopy is trading at $3.60 USD and $4.86 CAD today. At the end of the last quarter, Canopy reported $1.30 USD in cash and a liquidation value of $3.10 USD per share based on Tangible Book Value. We estimate an Earnings Per Share (EPS) loss of $1.71 USD for the next fiscal year. Adjusting for non-cash items, taxes, and interest, we project an EBITDA loss of $65M USD, or approximately $0.71 USD per share. Based on the company’s current cash balance, it has about over a year of runway based on EPS and almost two years based on EBITDA. This gives the company time to get to work increasing revenue and earnings before it would have a need to raise more capital.

How is the transparency of the financial statements or earnings rated? 

The transparency of the financial statements or earnings is assessed using the Beneish M-Score. The current rating of -6.45 indicates strong transparency in the financial statements, with no immediate concerns. However, it’s important to note that the Q3 report is not audited. Audits are conducted annually for public companies.

What is the risk of bankruptcy for Canopy?

The company currently has a strong cash position and other tangible assets, offering protection to shareholders. However, it needs to achieve positive earnings or, at the very least, positive non-adjusted EBITDA within the next year or two. Like any company facing continuous losses, failing to do so may eventually lead to a risk of bankruptcy.

Is there upside in the stock?

The company’s current price is $3.60 USD, with the average Wall Street analyst target at $4.99 USD over the next 12 months. Given the current low prices, most analysts anticipate a potential increase in value. If Canopy significantly outperforms, as CEO David Klein predicts, the upside could surpass current analyst estimates.

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