Roth sees upside potential in industry as BofA says consensus estimates are still too high
In this week's "Rising High," The Fly's recurring series focused on cannabis stock news, The Fly looks back at analyst views on the industry, Hexo Corp.'s (HEXO) withdrawal of FY20 guidance and agreement terminations.
ROTH SEES INDUSTRY POTENTIAL: In a Wednesday research note, Roth Capital analyst Scott Fortune said that stocks in the cannabis sector have declined during the six months since the first quarter with the industry "mired in a capital crunch, with a vape crisis to make matters worse." However, the analyst said he thinks the recently lower enthusiasm for cannabis stocks does not reflect the cannabis industry's prospects, as he still sees a lot of upside potential. A "meaningful shift" in investor focus to operational execution has led to a short-term correction in valuations, but the industry is still projected to grow at a 27% compound annual growth rate for the next three years, said Fortune, who advised that investors focus for now on companies with strong balance sheets and positive adjusted EBITDA who are nearing break even. On Monday, Fortune lowered his price target for Greenlane (GNLN) to $10 from $18.50 as a result of slowing vape sales industry wide. As the vape crisis continues to unfold and regulatory pressure on the JUUL e-cigarette business evolves, the analyst believes it is clear consumers are pausing in their consumption of legal vaping. He has a Buy rating on the shares.
BOFA SAYS CANNABIS ESTIMATES STILL TOO HIGH: BofA Merrill Lynch analyst Christopher Carey said on Monday that he thinks that valuations across the cannabis sector are looking more reasonable following the selloff since April, though he still believes consensus estimates for the group are likely at least 30% too high. Given this view, he is of the opinion that the true "buy" signal for the sector won't come until sales estimates are significantly recalibrated. Though individual companies could gain share on an industry level, sales estimates are too high, Carey contended, adding he thinks the stocks in the group could remain volatile for some time. He prefers Cronos Group (CRON), which he thinks stands out "as an especially attractive buying opportunity" following the group's pullback, Carey tells investors. He keeps a Buy rating on Cronos, has Neutral ratings on Aurora Cannabis (ACB) and Canopy Growth (CGC) and an Underperform rating on HEXO Corp.
HEXO CFO RESIGNS, COMPANY WITHDRAWS FY20 OUTLOOK: HEXO Corp. announced Friday that the company's CFO, Michael Monahan, has made the decision to resign. Stephen Burwash, currently VP of Strategic Finance for the company, has accepted the role of CFO.On Monday, BofA/Merrill analyst Christopher Carey downgraded HEXO Corp to Underperform from Buy with a C$4 price target following the abrupt resignation of its "high-caliber" CFO after only 4 months. The analyst thinks the corporate finance organization was less developed than Monahan had realized and likely indicates there is much work ahead.
On Thursday, HEXO Corp provided preliminary revenue for its fiscal fourth quarter and year ended July 31, 2019. The company also withdrew its previously issued financial outlook for fiscal 2020. Based on preliminary financial information and subject to year-end closing adjustments, HEXO said it expects net revenue for Q4 to be approximately $14.5M-$16.5M and net revenue for the year to be approximately $46.5M-$48.5M. "Fourth quarter revenue is below our expectation and guidance, primarily due to lower than expected product sell through," CEO Sebastien St-Louis said. "While we are disappointed with these results, we are making significant changes to our sales and operations strategy to drive future results. Over the past quarter, we began re-configuring our operations to focus on high-selling strains and initiated a new sales strategy that we believe will meaningfully improve performance.”
ALEAFIA HEALTH TERMINATES APHRIA AGREEMENT: Aleafia Health (ALEAF) announced Tuesday that it had provided Aphria (APHA) with a formal notice of the termination of the wholesale cannabis supply agreement between Aphria and Emblem providing for the provision by Aphria of up to 175,000 kg equivalents of cannabis products over an initial five-year term. The company said, “Following Aphria's failure to meet its supply obligations under the Supply Agreement, Emblem has exercised its contractual right to terminate the Supply Agreement in accordance with its terms.” Following the announcement, Aphria issued a statement, which said, "We are disappointed that Aleafia has chosen to terminate its Agreement with Aphria. The company had every intention of fulfilling its obligations under the Agreement. As a large shareholder of Aleafia, Aphria made good faith efforts to ensure continuation of the Agreement understanding it was in the best interest of all parties involved. However, the termination of this legacy Agreement frees up significant supply allowing the company to service its brands that are in high-demand across the country."
MEDMEN TERMINATES MERGER AGREEMENT: MedMen Enterprises (MMNFF) announced Tuesday the mutual agreement to terminate the business combination agreement, pursuant to which MedMen was to acquire PharmaCann in an all-stock transaction. The company said, “In light of market developments over the past 12 months and the continued evolution of its business strategy, MedMen and its Board have determined that focusing on leveraging the company’s retail brand, its leadership position in California, and its digital platform to grow the business will create greater shareholder value than the completion of the transaction.” In connection with the termination, PharmaCann agreed to transfer certain cannabis licenses and related assets in Illinois and Virginia to MedMen for no additional consideration from MedMen, other than the forgiveness of certain debt. Additionally, the company announced Zeeshan Hyder had been appointed CFO Hyder, currently MedMen’s chief corporate development officer, succeeds Michael Kramer, whose employment has been terminated.
OTHER CANNABIS STOCKS: Other publicly-traded companies in the space include Canopy Rivers (CNPOF), CV Sciences (CVSI), CannTrust Holdings (CTST), Cresco Labs (CRLBF), General Cannabis (CANN), India Globalization Capital (IGC), Innovative Industrial Properties (IIPR), ICC International Cannabis (KNHBF), Biome Grow (BIOIF), MediPharm Labs (MEDIF), Indiva (NDVAF), KushCo (KSHB), Elixinol Global (ELLXF), Planet 13 Holdings (PLNHF), Wayland Group (MRRCF), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), Organigram (OGI), Origin House (ORHOF), Sunniva (SNNVF), Sproutly (SRUTF), Tilray (TLRY), Trulieve (TCNNF), DionyMed Brands (HMDEF), GrowGeneration (GRWG), Harvest Health & Recreation (HRVSF), Zynerba (ZYNE), Delta 9 (VRNDF), Westleaf (WSLFF),Tetra Bio Pharma (TBPMF), Real Brands (RLDB) and Harborside (HSDEF).