CGC: How the Future Looks Under Its New CEO

On December 9, Canopy Growth (CGC) (WEED) appointed David Klein as its new CEO effective January 14. He’s the current CFO of CGC’s biggest stakeholder, Constellation Brands (STZ). He was selected from several candidates through a global recruitment company.

Canopy Growth’s founding member and current CEO, Mark Zekulin, will step down. He’ll also resign from the board of directors effective December 20. Constellation Brands has promoted Garth Hankinson to executive vice president and CFO effective January 13, 2020.

The top management shakeup at CGC began in July 2019, when the Constellation Brands–dominated board of directors fired co-CEO Bruce Linton. Thereafter, Zekulin agreed to become CGC’s CEO until the company found an appropriate replacement. Constellation Brands secured around a 40% stake in CGC in exchange for an investment of 5 billion Canadian dollars. Linton has now joined US cannabis company Vireo Health as its executive chair.

As reported by MarketWatch, analysts have opted for a cautious stance on CGC’s recent management change in the face of the overall challenges in the cannabis sector.

How CGC and STZ reacted to the news

Following this news, Canopy Growth’s shares soared 13.95% to 28.17 Canadian dollars on the TSE on December 9. The stock also jumped 14.15% to $21.29 on the NYSE. However, on December 10, it fell 5.57% to 26.60 Canadian dollars on the TSE and 5.64% to $20.09 on the NYSE. It’s down 32.28% YTD (year-to-date) on the TSE and 30.53% YTD on the NYSE. In comparison, STZ fell 1.29% to $181.27 on December 9 and 0.19% to $180.93 on December 10.

On December 10, the ETFMG Alternative Harvest ETF (MJ), the Horizons Marijuana Life Sciences Index ETF (HMMJ), and the Cambria Cannabis ETF (TOKE) fell 0.35%, 2.41%, and 0.94%, respectively.

MKM analyst highlights the challenges ahead

As reported by MarketWatch, MKM analyst Bill Kirk expects the new CEO to bring a higher degree of “fiscal discipline” to CGC’s operations. However, he also explained that this management change won’t solve all of CGC’s problems. He reiterated concerns about CGC’s equity compensation and general and administrative expenses exceeding revenue. He also questioned the company’s inventory levels, which are in a surplus compared to demand.

Kirk expects Klein to address these issues by opting for certain mechanisms that may hamper employee and investor sentiment. They involve lowering head count, lowering salaries, lowering discretionary pay, and destroying excess inventory.

The analyst remains skeptical about CGC’s consensus estimates, even if the company implements all these solutions to optimize expenses. He thinks its expectation of 100% revenue growth in the 12 months starting in the second quarter of fiscal 2020 is unattainable for any consumer products company, including CGC. He reiterated a neutral rating and a target price of 23 Canadian dollars on CGC.

Cantor Fitzgerald analyst hints at the possibility of a CGC takeover

On December 9, as reported by The Fly, Cantor Fitzgerald analyst Pablo Zuanic expressed surprise at Constellation Brands’ delay in appointing a new CEO for CGC. He believes that there’s more than a 66% probability of STZ making an acquisition bid for CGC. However, this deal could dilute STZ’s earnings in the mid- to high-teen percentage as well as pull down its share price. A CGC acquisition would also reduce the quality of STZ’s balance sheet.

Despite these challenges, Zuanic expects STZ to justify such a deal based on the argument of an improving cannabis outlook in the coming quarters. He has a “neutral” rating on CGC and a target price of 18.90 Canadian dollars.

Seaport Global and Jefferies expect an increase in Constellation Brands’ control

On December 10, according to MarketWatch, Seaport Global analyst Brett Hundley expects David Klein to focus extensively on CGC’s profitability. He also expects a significant reduction in CGC’s selling, general, and administrative expenses, capex, and business investments in fiscal 2021. However, he believes that such cost-cutting is essential due to the company’s high cash burn rate and increasing losses in the last two quarters. CGC used almost $800 million worth funds and reported cumulative adjusted EBITDA losses of nearly $250 million in the past two quarters.

On December 10, as reported by MarketWatch, Jefferies analyst Owen Bennett expressed mixed opinions about CGC’s management change. He expects CGC to benefit from STZ’s increased focus and commitment. However, he’s also concerned about STZ’s high focus on the yet-unproven cannabis-infused beverages segment. He anticipates a weak financial performance for CGC in the coming quarters due to difficult market conditions in Canada. Hence, despite a CEO change, Bennett has rated CGC as “underperform.”