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Feb. 9, 2022, 11:45 a.m. EST · CORRECTED

Canopy Growth and Aurora Cannabis are expected to generate less red ink when they report earnings this week

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By Steve Gelsi

This updates an earlier report that incorrectly described the Global X Cannabis ETF.

Aurora Cannabis Inc. and Canopy Growth Corp. are expected to remain in the red but trim their losses when they release financial results later this week, as they face a sluggish legal cannabis market in Canada.

“Generally speaking, the largest manufacturers are having difficulty meeting Canadian recreational consumer needs either via an inability to grow the right product or a lack of understanding what the consumer wants,” MKM Partners analyst Bill Kirk said Tuesday.

In an attempt to hold its market share, Canopy Growth has moved to emphasize higher potency, single strains flower as part of an overall focus on premium products, along with accelerated distribution of its BioSteel drinks. It’s also been focusing on U.S. CBD sales via its Martha Stewart lines, Cantor Fitzgerald analyst Pablo Zuanic said last month.

While the fight over Canadian market share remains costly and price pressure is expected to continue, the economic reopening from the COVID-19 pandemic and increased store count could boost performance in the sector, MKM Partners analyst Kirk said.

Kirk reiterated a buy rating on Canopy Growth /zigman2/quotes/200603886/composite CGC +4.57% /zigman2/quotes/202205609/delayed CA:WEED +1.69% and a neutral rating on Aurora Cannabis /zigman2/quotes/210559470/composite ACB -0.75% /zigman2/quotes/203734337/delayed CA:ACB 0.00% , but cut his price targets for both. He reduced Canopy Growth’s target price to C$17 ($13.38) from C$28 and cut the Aurora Cannabis target price to C$6 from C$8.

“We believe Canopy has rationalized its organization (supply chain, logistics, infrastructure) to better capture formerly missed opportunities,” he said. “Canopy is better suited to build brands via greater research and development focus than peers.”

First up on Wednesday, Canopy Growth is expected to report a third-quarter loss of 28 cents a share, narrower than its year-ago loss of C$2.43 a share, according to an analyst survey by FactSet. Canopy Growth, which is controlled by spirits giant Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ +0.31% , is on tap to report third-quarter revenue of C$135.9 million, down from C$152.5 million in the year-ago quarter.

In November, Canopy growth named Judy Hong as interim chief financial officer and Tara Rozalowsky as interim chief product officer under CEO David Klein.

Aurora Cannabis is expected to report a second-quarter loss of 24 cents a share, compared with a year-ago loss of C$1.74 a share, according to a survey by FactSet. Second-quarter sales are expected to total C$59.1 million, down from C$67.7 million in the year-ago quarter. The company will report on Thursday afternoon after the market closes.

Pedro Palandrani, analyst at the Global X Cannabis ETF /zigman2/quotes/214261331/composite POTX +4.34% , said about 10% of the fund is invested in Sundial Growers Inc. /zigman2/quotes/213489825/composite SNDL +3.83% ; 9% in Cronos /zigman2/quotes/206842762/composite CRON +1.95% and Organigram Holdings /zigman2/quotes/209289540/lastsale OGI -1.96% , and 8% each in Aurora Cannabis and Canopy Growth.

Palandrani said he’s looking to hear about plans to generate profits down the road from Aurora Cannabis and Canopy Growth.

“It’s important for investors to understand that they’re trying to capture a growth opportunity in a business that’s in the early innings of adoption,” Palandrani said. “Cannabis was legalized in Canada just three or four years ago and it’s understandable that they don’t have profits.”

With the Canadian cannabis market challenges well publicized, shares of Canopy Growth and Aurora Cannabis have been weak.

Canopy Growth stock is down 12% this year, including a drop of 2.2% on Tuesday. Aurora Cannabis shares fell 0.8% on Tuesday and have lost 23.4% in 2022. The Global X Cannabis ETF /zigman2/quotes/214261331/composite POTX +4.34% has lost 10.3% this year, but it’s up 1.7% on Tuesday.

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