MKM: Canadian Cannabis Grower Profits Will Disappoint The Street

Most cannabis stocks are trending at or near their 52-week lows, with the imminent earnings season creating anxiety in the minds of traders.

In its fourth-quarter report, Aurora Cannabis Inc ACB warned of slower buying by provinces in July and August.

The Analyst

MKM Partners analyst William Kirk  has the following ratings and price targets for cannabis stocks in his coverage universe:

• Canopy Growth Corp CGC: Neutral, $33
• Cronos Group Inc CRON: Neutral, $14
• Aurora Cannabis: Sell, $5
• Hexo Corp HEXO: Buy, $12
• Tilray Inc TLRY: Neutral, $34

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The Thesis

Slower buying by provinces and no signs new retail locations opening in Ontario in October has poured cold water on expectations for the next reporting quarter, Kirk said in a Wednesday note. (See his track record here.) 

The analyst does not project meaningful sales acceleration for Canadian licensed cannabis producers.

Profitability is also likely to disappoint due to potential sequential revenue declines and increased costs, he said. 

MKM expects Canopy Growth to turn to positive EBITDA by the first quarter of 2022, as opposed to the consensus expectation of the first quarter of 2021.

For Aurora, the firm expects a turnaround in the first quarter of 2021 compared to the consensus estimate of the third quarter of 2020.

MKM's estimates and the Street align only for Hexo, which is expected to turn to positive EBITDA by the second quarter of 2020.

"We think a looming weak reporting season will gradually push consensus expectations toward ours," Kirk said. 

Going forward, the analyst estimates further profitability decreases, as flower and production for extraction becomes commoditized.

With prices decreasing and consumption per federal license on the decline, the future holds a less profitable system than exists today, he said. 

Rather than wild profitability in two years, Kirk forecast a roughly break-even scenario for the Canadian licensed producers. 

Merely holding the SG&A expenses flat on an absolute basis does not produce the P&L leverage to reach the consensus estimates, according to MKM Partners.  

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