Marijuana investors have been looking forward to this moment, when large companies in the cannabis sector finally tell them how one of the most important events in the emerging industry's history has affected their businesses. In particular, Canopy Growth (NYSE: CGC) has drawn a great deal of attention because of its high profile movements to build capacity and the large partnership with beer and spirits Constellation Brands .
Coming into Thursday's financial accounts for the third quarter, Canopy investors were optimistic about how the company would perform in Canada's roll out of recreational cannabis. Canopy numbers were impressive, but even more encouraging was the management's discussion of the company's strategic intentions. Shareholders look forward to the news, and there is plenty of opportunity for further growth in Canopy's future.
Canopy gets a big boost
Canopy Growth's fiscal performance in the third quarter gave investors most of what they were looking for. Net income after tax came to 83 million Canadian dollars ($ 62.5 million), up 282% from the quarter and well above the $ 23.2 million that Canopy brought in just three months ago. Net income increased to $ 74.9 million, translating into earnings per share of $ 0.22, well above consensus expectations for a loss of CA $ 0.17 per share.
Many of Canopy's basic business numbers showed incredible growth. The company quadrupled its sales volume for the quarter and sold more than 10,100 kilograms of cannabis compared to just 2,330 a year ago. At the same time, Canopy was able to increase its pricing for several of its sales categories, with the average selling price of its medical marijuana products in Canada, which increased 19% to $ 9.77 per gram. Similar success came internationally, and prices climbed 5% to $ 13.28 per gram. As expected, recreational use of cannabis prices was more competitive, and sales prices of $ 6.96 per gram were lower than the corresponding medical marijuana products. This meant that Canopy's total average selling price per gram was reduced by 12%, but given the change in the sales mix to include recreational products, the company was not satisfied with that result.
Cannabis-derived oils remain a major focus area for Canopy. The company reported that 33% of product revenue comes from oils, with its well-labeled Softgel capsule products.
One thing that Canopy investors need to understand is that much of the company's bottom line came from adjustments related to changes in the value of outstanding financial liabilities. Particularly because Canopy reported more than $ 220 million in profit and loss adjustments because the fair value of senior convertible notes and other financial assets declined over the last measurement period. Without these adjustments, Canopy would have seen significant losses, as the cost of the period increased dramatically. Total operating costs rose almost fourfold from the previous year, as large increases in sales and marketing, research and development, and overheads all hit Canopy's bottom line. Stock-based compensation costs were also much higher.
CEO Bruce Linton has the long head in mind. "Our successful first full-time recreation center in Canada," Linton said, "strengthens our long-term strategy to make meaningful investments early to secure market share." The CEO continued to notice that the company "takes care of the consumer's attention" with its first wave of products in Canada to meet recreational needs.
Canopy continues to dominate?
Canopy has much more ambitious future plans. Legalization of hemp will play a key role, and Linton expects Canopy "to continue expanding by making strategic manufacturing investments in regions with federally-permitted paths to the market for our cannabis and hammock offers."
Other strategic features include the following:
- New multi-company supply agreements to extract larger quantities of cannabis oil
- add to the Tokyo Smoke retail channel as a complement to the existing Tweed brand
- conducting key growing growing construction under construction
- exploration of intangible property opportunities related to innovative growth techniques
Most importantly, Canopy is still in a good position to consider massive investment in its business for the foreseeable future. Thanks to the large investment made by Constellation Brands, Canopy has more than $ 4.1 billion in cash and equivalents available for potential expenses. It puts the marijuana company in a good position to choose from investment opportunities available in the industry, without fear of being overwhelmed by less well-capitalized rivals.
Canopy investors were happy with the report and sent the share price up 5% early Friday after the announcement. With so many prosperity opportunities, it is not surprising that shareholders are more excited than ever about the potential that Canopy Growth is entering in 2019.
Dan Caplinger has no position in any of the listed shares. Motley Fool has no position in any of the aforementioned shares. Motley Fool has a disclosure policy.