Bottom Line

Effective mid-January, Canopy Growth Corporation (TSX: WEED; NYSE: CGC) will operate under a new Chief Executive Officer.

After moving into the role of Chairperson of the Board of Directors for Canopy Growth back in October, Constellation Brands CFO David Klein has been appointed CEO of Canopy.

Klein just stepped down today to fully focus on Canopy Growth operations.

So what does this new appointment signal for Canopy?

The CFO is a numbers guy, not an innovator, making this appointment a clear signal that cost-cuts and profits are now the focus with hyper-growth a thing of the past.

Profits are a great thing, but Canopy was originally built on the promise of revenue growth and impenetrable market share.

If the market is expecting big revenue growth and Canopy doesn’t deliver as it shifts to a profit focus, the stock could still fall next year.

Analysts expect revenue to grow 83% to C$674 in 2020.  Depending on how far prices fall in 2020 C$674 million of revenue would require volumes sold to either double or potentially triple, a lofty goal.  

In the example below, we can see volumes need to double if pricing stays where it was in the third quarter.

Money losing stocks are priced off of revenue and if revenue disappoints that means the stock price has to fall with it.

Analysts Consensus for Canopy Growth

2019 Forecast2020 ForecastYoY Change
Revenue (C$mm)36767483%
Rev/Gram$8.2$7.5-8%
Grams Sold (‘000 kg)4590100%

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If we ignore revenue and focus on profit, as the new CEO likely will, the stock could end up exceeding expectations.

This wouldn’t be hard to do with the market expecting C$260 million of EBITDA losses in 2020.

Realistically, however, Canopy would have to generate C$200 million of EBITDA to even trade at 50x based on the current C$10 billion market cap.

Even with a new CEO focused on righting the ship, it is highly likely results will continue to disappoint against still elevated expectations, pulling Canopy stock lower in 2020.

 

A Constellation Buyout is a Likely Endgame

Now that Constellation owns 57% of the board seats plus has a friend in the CEO seat, the probability it eventually buys out a majority stake in Canopy is very high in our opinion.

Constellation already has control of the board so the need to own a majority of shares just isn’t there right now.

Given that the deal terms don’t allow Constellation to buy enough shares in the open market to build a majority position, we think the most likely outcome is as follows.

The Canopy-Constellation Endgame

  • Constellation will buy the 20 million shares built into the deal terms on the open market if Canopy stock falls back into the teens and then wait to see if the 88.5 million warrants will convert at C$50.40/sh longer term so they can own a majority of the stock.
  • If Canopy’s stock price falls too far or the company runs into financial distress, Constellation will negotiate a cash infusion that pushes its ownership percentage past 51% or negotiate a complete buyout.
  • Even with a full buyout, the offering price would be far below where the stock trades today

Investors should be wary of betting on Constellation to rescue them if market developments lead to another slide in the Canopy stock price. The rationale for a buyout just doesn’t look to be there.

 

More Details About the CEO Announcement

A major investor in the company, Constellation has taken a much more active role in Canopy operations in recent months after disappointing quarterly numbers revealed the Canadian cannabis market is much smaller than expected.

SVP of Corporate Development Garth Hankinson took over the Chief Financial Officer role at Constellation as of this morning.

Klein brings consumer packaged goods and alcoholic beverage regulatory experience to Canopy Growth, and will step in for outgoing CEO Mark Zekulin. One of the founding members of Canopy, Zekulin is also resigning his board seat in the management change up.

Discussing the switch to Chief Executive Officer of Canopy, David Klein issued this statement:

Thanks to the efforts of Mark and the entire team at Canopy Growth, no company is better positioned to win in the emerging cannabis market. I look forward to working with the team to build on the foundation that has been laid, developing brands that strongly resonate with consumers, and to capture the market opportunity before us. Together we will drive sustainable, industry-leading growth that benefits employees, shareholders and the communities in which we operate.

At this point Canopy hasn’t announced who will take over the position of Board Chairperson in light of Klein’s promotion.

Canopy is currently preparing for the launch of value-added “cannabis 2.0” products, which have seen a delay from mid-December to a staggered release beginning in early January.

The first batches of fully licensed THC chocolates, infused beverages, and vape cartridges will begin hitting store shelves in three weeks, with a full rollout to commence throughout February and March.

In other company news, Canopy recently announced an international collaboration with musician Drake to grow, process, and distribute cannabis with packaging designed by Drake.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.