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Sept. 24, 2021, 1:26 p.m. EDT

Canadian cannabis companies won’t turn a profit in the coming quarter and here’s why

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By Steve Gelsi

Canadian cannabis companies, still struggling to show a profit, are unlikely to deliver one in their coming quarterly earnings, in more bad news for hard-hit stocks after a stretch of weaker share prices.

CIBC analyst John Zamparo this week pared back his firm’s stock price projections for the sector. The roughly 25% decline as measured by sector ETFs over the past three months is the result of continued losses from Canadian cannabis companies, the dearth of institutional investors in the space, and the realization that U.S. legalization appears unlikely until at least next year, Zamparo said.

“Recent negative sentiment [is] a product of deferred U.S. legalization and lack of Canadian profitability,” he said. “We are reducing the price targets across our cannabis coverage universe to reflect more moderate valuation multiples as a result of elusive profitability.”

CIBC trimmed its price targets for Canopy Growth Corp /zigman2/quotes/200603886/composite CGC -1.68% /zigman2/quotes/224330431/delayed CA:WEED.WT 0.00% , Tilray /zigman2/quotes/209129655/composite TLRY -1.77% /zigman2/quotes/226578748/delayed CA:TLRY +0.07% , Aurora Cannabis /zigman2/quotes/210559470/composite ACB -1.09% /zigman2/quotes/203734337/delayed CA:ACB -3.18% , OrganiGram Holdings /zigman2/quotes/209289540/composite OGI -2.05% , Cronos Group /zigman2/quotes/202715342/delayed CA:CRON +2.65% /zigman2/quotes/206842762/composite CRON -1.68% , Hexo /zigman2/quotes/206508254/composite HEXO -1.10% /zigman2/quotes/200008967/delayed CA:HEXO +0.45% and RIV Capital Inc. /zigman2/quotes/228992138/delayed CA:RIV +3.70% .

Looking ahead, CIBC only expects Hexo and Tilray to be profitable in 2022, while it will take longer for most of the other names to follow suit.

See also: Cannabis sector is not banking on help from Congress before 2022

Not all recent headlines have been negative, however. This week, Canada reported record July retail sales of C$338.9 million, up 6% from June.  

And in Washington, D.C., lawmakers included the SAFE Banking measure in the U.S. of Representatives annual defense bill. The measure would potentially open up the legal cannabis business to the federal banking system and free up the flow of capital in the sector. But it remains to be seen what happens to the measure in the Senate, given that body has not moved to approve earlier versions of the SAFE Banking act from the House.

CIBC analyst Zamparo said the SAFE Banking Act appears to have a meaningful chance of passing in the U.S. Senate, but it still would not permit Canadian companies to operate in the U.S.

Read also: Cannabis company TerrAscend moves into Michigan with $545 million all-stock Gage Growth acquisition

Meanwhile, the coming quarter will mark yet another three-month period in the red for cannabis companies.

Last quarter, a trio of Canadian cannabis companies did produce net income, but in each case it was due to non-cash gains. Two of the three also missed revenue consensus estimates.

Overall, the Canadian market continues to feel the impact of the pandemic on physical stores, as well as headwinds from competition and price pressure.

As Cannabis adult use cannabis legalization reaches the three year mark this year, the sector still has a long way to go before it starts making money.

Korey Bauer, chief investment officer of the Cannabis Growth Fund at Foothill Capital Management, said last month that valuations look better in the U.S., where companies have been profitable.

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