Pot Company Earnings Unlikely to Stop the Rot: Cannabis Weekly
Pot Company Earnings Unlikely to Stop the Rot: Cannabis Weekly
(Bloomberg) -- Investors searching for a bandage to stanch the bleeding in pot stocks aren’t going to find it in third-quarter earnings.
The four largest Canadian pot companies by market value will report results for the quarter ended Sept. 30 this week and the expectations are low. This doesn’t bode well for stock prices, which are already down nearly 60% for the sector from recent highs in March.
Much like recent quarters, investors are likely to be laser-focused on “timetables toward Ebitda profitability,” which probably isn’t in the cards until 2020 or 2021, according to Bloomberg Intelligence analyst Kenneth Shea.
Bank of Montreal analyst Tamy Chen expects industrywide sales to Canada’s provincial wholesalers to decline 20% quarter-over-quarter amid a slow rollout of retail storefronts that has left them sitting on too much inventory from licensed producers, or LPs.
This raises the risk that provinces will return some product to companies, which may also be facing inventory writedowns, she wrote in a recent note.
For Cowen analyst Vivien Azer, who cut her price targets on all the Canadian pot companies in her coverage universe last month, there are many negatives still facing the sector but she was heartened by the 19% month-over-month growth in August retail sales reported by Statistics Canada.
“This performance comes while the industry has faced multiple headwinds,” Azer wrote. “We look for indications on whether category headwinds are beginning to abate.”
Highly Competitive
Despite an inventory glut in some categories, lots of other products are still selling out. “This likely helps to explain why so many consumers are still relying on illicit channels to purchase cannabis,” she said.
Overall, Azer is “cautious” on third-quarter results for the Canadian producers. She’s more optimistic on the U.S. cannabis companies, which had “a largely favorable backdrop with quarterly sequential retail sales growth throughout the year, and few of the bottlenecks that have inhibited Canadian adult-use rollout.” However, they too are facing the twin risks of “outsized cash burn and Ebitda losses.”
And things aren’t necessarily going to get any easier in 2020 despite a growing store count and the introduction of new product formats like edibles and vapes, according to Canaccord Genuity analyst Matt Bottomley.
While the sector as a whole will experience “significant growth” next year, the market will be highly competitive and that growth won’t be evenly distributed.
“It is clear to us that many producers will be competing for a piece of a finite pie,” Bottomley wrote. “As a result of our market expectations for 2020, we have made substantial downward revisions to virtually all our Canadian LPs under coverage.”
Upcoming Events This Week
MONDAY 11/11
- Neptune Wellness Solutions Inc. reports earnings pre-market
TUESDAY 11/12
- Cowen & Co. holds a cannabis conference in Boston through Nov. 13
- Cronos Group Inc., MediPharm Labs Corp. and Aleafia Health Inc. report pre-market
- Tilray Inc. and Acreage Holdings Inc. report post-market
WEDNESDAY 11/13
- Institutional Capital & Cannabis, better known as IC3, holds a real estate conference in Los Angeles
- Charlotte’s Web Holdings Inc. reports pre-market
- Sundial Growers Inc. reports post-market
THURSDAY 11/14
- Canopy Growth Corp. and Canopy Rivers Inc. report pre-market
- Aurora Cannabis Inc. and Green Organic Dutchman Holdings Ltd. report earnings post-market
FRIDAY 11/15
- Jushi Holdings Inc. reports pre-market
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To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net
To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jacqueline Thorpe
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