Bank Of America: There's Still A Canadian Cannabis Bottleneck

Cannabis stocks have been under pressure in recent months, as sales growth in the Canadian market hasn’t followed the explosive trajectory many investors had hoped.

Bank of America Merrill Lynch analyst Christopher Carey said in a Thursday note that the latest Canadian cannabis volume numbers from Statistics Canada reveal a clear bottleneck in cannabis production.

The latest numbers from the month of June show that total dried cannabis sales volume were up 5% on a monthly basis. That number includes an 8% increase in non-medical sales and a 10% drop in medical sales.

Overall oil sales were down 2% on a monthly basis, including 21% growth in non-medicinal sales and an 18% drop in medicinal sales. Canadian legalization has led to a shift from medical to recreational sales, the Bank of America analyst said. 

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Unfinished Inventory Building

On the inventory front, Carey said there’s an important distinction for investors to make between finished and unfinished inventory.

Finished inventory is cannabis that is tested, packaged, labeled and ready to sell, while unfinished inventory is missing at least one of those steps.

The total unfinished Canadian cannabis inventory currently dwarfs the amount of finished inventory, a phenomenon that is weighing on sales numbers, the analyst said. 

Finished dried flower inventory was up 23% on a monthly basis to 48,918 kg, while unfinished inventory was up 18% to 262,333 kg. Finished oil inventory was up 15% in June to 98,123 liters, while unfinished inventory was up 2% to 43,058 liters.

Carey said there is clearly not enough finished inventory in the channel to meet market demand.

“There is clearly a significantly higher level of unfinished vs. finished inventory for both oil and flower, in our view indicating that the conversion into finished remains a bottleneck,” he said. 

Benzinga’s Take

The recent weakness in cannabis stocks like Canopy Growth Corp CGC, Aurora Cannabis Inc ACB and Cronos Group Inc CRON has come largely due to a mixed earnings season for cannabis producers.

However, the June volume and inventory numbers are a clear indication of just how messy the cannabis market is at this stage, and cannabis investors will likely continue to deal with a lot of noise and volatility for the foreseeable future.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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