Canopy Growth stock was falling Thursday, the morning after it announced notable spending cuts, but some people on Wall Street are welcoming the news.
The company plans to close two greenhouses, canceled the opening of another one, and is cutting 500 jobs. The marijuana grower plans to record a charge of between 700 million Canadian dollars (US$523 million) and C$800 million during its March quarter.
A handful of analysts applauded the move as progress in an effort by David Klein, the company’s new CEO, to reduce the amount of cash Canopy is burning through.
Klein, formerly the chief financial officer at Canopy’s controlling shareholder, Constellation Brands (STZ), took over as Canopy’s chief executive in January. Constellation has put pressure on Canopy to reduce its spending.
BMO Capital Markets analyst Tamy Chen noted that the greenhouses being closed are the marijuana grower’s two largest. They accounted for at least half of the 30 metric tons of pot Canopy produced last quarter, according to Chen.
“We believe this highlights the undisciplined capital spending by previous management, but we believe this should meaningfully reduce the company’s cost structure and quarterly cash burn,” Chen wrote.
She maintained an Outperform rating on the stock with a price target of C$40. Shares closed at C$23.77 on Wednesday.
The company is listed on both the Toronto Stock Exchange and the New York Stock Exchange. Its shares on the NYSE (CGC) were down 4.3% to US$16.99, while the S&P 500 index had fallen 2.1%. The ETFMG Alternative Harvest ETF, an exchange-traded fund with exposure to cannabis stocks, was down 1.8%.
Jefferies analyst Owen Bennett wrote in a note Thursday that the reduction in capacity wasn’t a surprise given that the company had more production space than it needed. The latest move is likely to be seen as supportive for the stock, he said, noting that reducing operating expenses is the biggest lever Canadian growers can pull to move toward profitability.
“We also think this is a positive signal that the new CEO is serious about instilling the financial rigor that many have been hoping for,” Bennett wrote.
Canopy said Wednesday that Canada had changed its federal regulations to allow growers to produce pot outside after it had already invested in its greenhouses. The company now has an outdoor production site, which it said is more cost-effective than greenhouses.
Bennett questioned what the shift toward pot grown outdoors will mean from a quality standpoint, something that has been an issue for other producers. Bennett maintained an Underperform rating and a $17.30 price target.
Stifel analyst Andrew Carter called the changes a significant shift.
“We believe the company carefully considered its cultivation footprint for both current and future needs,” he wrote. “But with 15 million square feet of licensed cultivation alongside the option for outdoor growing, there is limited value for indoor production particularly greenhouse cultivation.”
Carter maintained a Buy rating with a C$35 price target. He thinks the shares could rise in the near term, as investors decide Canopy deserves a higher valuation than its peers. The company has an increasing competitive advantage in a world where well positioned cannabis companies are limited, he said.
“And as Canopy continues to demonstrate stronger execution with a visible path towards sustainable profitability, we believe the opportunity for the shares will be evaluation within the context of its transformative growth prospects,” he wrote.
