Canopy Growth Analysts Back Closures, Layoffs: 'A Bold Move'

Cannabis company Canopy Growth Corp CGC announced a "production optimization plan" Wednesday that involves closing two facilities and slashing 500 jobs.

The Canopy Growth Analysts

MKM Partners’ Bill Kirk reiterated a Neutral rating on Canopy.

BofA’s Christopher Carey maintained a Buy rating on the stock with a price objective of CA$36 ($26.83).

MKM Partners Believes In New Canopy CEO

Canopy should be in a better position concentrating on its research and development activities than its competition, Kirk said in a note. 

“Canopy's excessive equity comp policy has been responsible for much of its losses, and its inventory levels and capacity are risky if future demand doesn’t materialize and/or is delayed,” the analyst said. 

New CEO David Klein should be able to establish better fiscal accuracy, he said. 

A few spending items seem exaggerated, such as equity comp; G&A being larger than revenue; and inventory levels that don’t align with demand, Kirk said. 

These problems could be tackled with a lower number of employees, lower salaries, lower discretionary pay, facility closures and/or inventory destruction, he said. 

“None of these paths, while necessary, are good for morale.”

BofA Praises Canopy's 'Bold' Move

“This is a bold move, which we view positively, offloading a long weight on Canopy results, and likely freeing significant working capital in the process,” Carey said in a Wednesday note.

Canopy’s latest move recognizes past errors, but also displays fearlessness to make hard, but correct moves to produce long-term value, the analyst said. 

Although this could help improve SG&A, it will be of higher importance to the company’s cash flow, and working capital in particular, he said. 

"With a nearly halving of capacity, working cap drain could materially improve,” Carey said. 

“We think these cuts are the right move for long term, showing mgmt. has the wherewithal to do what is required to create a sustainable, profitable business." 

BoFA: Other Cannabis Companies Could Follow Canopy's Lead 

Canopy's downsizing could trigger other cannabis companies to do the same, Carey said in a separate industry overview note. 

BofA projects that Canopy's cutbacks remove around 20% from total industry capacity in Canada.

Even though the present production capacity in Canada after Canopy’s reduction should be closer to the total consumption BofA projects for the country, theoretical supply is still much bigger than legal demand, Carey said: "more cuts are likely needed.”

CGC Price Action

Canopy shares were trading 1.92% lower at $17.41 at the time of publication Thursday. 

Courtesy photo.