By Ciara Linnane
Jefferies upgraded two Canadian cannabis stocks on Thursday and reduced his price target on a third, while remaining most bullish on buy-rated OrganiGram Holdings Inc., which it said is “really starting to hit its stride.”
Analyst Owen Bennett upgraded Cronos Group Inc. /zigman2/quotes/206842762/composite CRON +6.13% /zigman2/quotes/202715342/delayed CA:CRON +6.14% and Hexo Corp. /zigman2/quotes/206508254/composite HEXO +8.24% /zigman2/quotes/200008967/delayed CA:HEXO +6.67% to hold from underperform, not a ringing endorsement of either stock which are both unlikely to be profitable soon.
The analyst lowered his price target for Tilray Inc. /zigman2/quotes/209129655/composite TLRY +9.83% to $17 from $22 previously, to reflect headwinds in the Canadian adult-use market.
“While recent Q2 top-line was clearly disappointing due to Canadian adult-use, it needs to be put into context — Canada adult-use
“Beyond this, its international optionality is compelling, both Europe and U.S., and it remains the most attractive Canadian operator in our view,” said the note.
Investors are newly optimistic about the European market since Germany decided to legalize weed for adult use. The country’s new coalition government said it would allow the sale of cannabis to adults in licensed shops although it has not yet set a timetable for the rollout.
“Tilray’s European strength was evident in its international sales which came in at an estimated $11 [million] post-tax for the quarter — now 19% of total cannabis sales, and up 34% sequentially,” said Bennett, referring to the company’s recent fiscal second-quarter earnings.
Chief Executive Irwin Simon said Tilray has an estimated 20% share of the German medical market, making it the leader.
We believe this, coupled with our infrastructure, will also allow us to capture the adult-use market as legalization accelerates under the new coalition government,” he told MarketWatch.
But Bennett’s highest praise was reserved for OrganiGram /zigman2/quotes/209289540/lastsale OGI +8.18% following its fiscal first-quarter earnings that showed revenue of C$30.4 million ($23.9 million) from C$19.3 million, ahead of the FactSet consensus of C$29.2 million.
CEO Beena Goldenberg said OrganiGram (OGI) is now expecting to reach positive adjusted EBITDA (earnings before interest, taxes depreciation and amortization) in its fiscal third quarter, ahead of earlier guidance for a positive result in the fourth quarter.
That goal is expected to be bolstered by the acquisition of Laurentian Organic Inc., a private Quebec-based producer of hash and craft cannabis, that took place after quarter-end. That deal is expected to be immediately accretive and to give the company a foothold in the Quebec market.
“For us, this is a testament to OGI having among the most impressive portfolios across the space and taking the time to understand the consumer,” Bennett wrote. “Recent sales delivery continued to impress. “
The analyst also praised OrganiGram’s “robust balance sheet” which has been bolstered by a $176 million investment from British American Tobacco PLC /zigman2/quotes/210207837/composite BTI +0.98% /zigman2/quotes/209116881/delayed UK:BATS +0.50% . The company also has C$170 million in cash and a C$500 million shelf registration that has not yet been tapped.
Bennett’s note on Cronos notes that the outlook is worsening, but the support the company has from Altria Group Inc.’s /zigman2/quotes/208895754/composite MO +1.32% cash “means little risk as a going concern and with the stock now not too far off its cash value, we upgrade to hold.”
On Hexo, which has fallen to a 48-cent stock, Bennett wrote that underlying trends and industry price competition are a worry, given how much near-term debt the company has.
“Although outlining a new plan to improve cash flow, we think the targeted uptick is out of reach,” he wrote. “More dilution likely, limitations on ability to invest, and a (second) reverse split could be required to keep NASDAQ listing.”
With those risks priced into the current price, Bennett upgraded Hexo to hold.
Hexo shares were down 3.7% Thursday, and have lost 32% in the year to date. Tilray was down 7% and has lost 26% in the year so far.
OrganiGram was down 2.4% and has lost 24% in the year to date, while Cronos was off 3% and has lost 16% in the year to date.