By Steve Gelsi
Stifel analyst W. Andrew Carter on Monday said the firm continues to approach the cannabis sector with “negative overall bias” amid a reduced outlook for the U.S. market and lackluster performance in the hydroponics sector.
Carter trimmed his view for the total 2022 U.S. cannabis sales to $27.2 billion from an earlier estimate of $28.6 billion amid decelerating category growth, oversupply, outsized pressure on lower income consumer spending, rising input costinflation and increased capital costs.
Stifel reiterated sell ratings on Aurora Cannabis /zigman2/quotes/203734337/delayed CA:ACB +4.73% /zigman2/quotes/210559470/composite ACB +1.21% and Canopy Growth /zigman2/quotes/200603886/composite CGC -5.34% /zigman2/quotes/202205609/delayed CA:WEED -3.86% because of an “increasingly difficult Canadian market.” The brokerage cut its Aurora Cannabis price target to C$3.00 from C$3.50 and trimmed Canopy Growth’s price target to C$6 from C$7.50.
Cannabis software maker WM Technology Inc. /zigman2/quotes/214483293/composite MAPS +6.27% stands out as “the best positioned” cannabis name to capitalize on category growth, with shares that continue to undervalue a “robust” growth outlook, he said. WM Technology’s price target was reduced by $1 to $10 a share.
Carter also remains “increasingly positive” on Altria Group Inc. /zigman2/quotes/208895754/composite MO -1.80% -backed Cronos Group Inc. /zigman2/quotes/206842762/composite CRON +2.27% /zigman2/quotes/202715342/delayed CA:CRON +6.35% on strength in its Spinach cannabis business, as well as accessories seller GrowGeneration Corp. /zigman2/quotes/207254713/composite GRWG +9.89% on its supply chain skills. Cronos’s price target was set at $4 a share, while GrowGeneration’s price target was trimmed to $8.50 a share from $9.
Stifel shaved its 2022 earnings view on ScottsMiracle-Gro Co. /zigman2/quotes/200553749/composite SMG +1.81% to $7.31 a share from $8.02 a share on weakness in its Hawthrorne hydroponics business and an overall recession in the business. Stifel cut its price target on the company to $130 a share from $160 a share.
“We now estimate a less fulsome recovery for Hawthorne… given colder weather, and higher input costs,” Carter said. “But with our reductions, we believe the earnings growth profile remains undervalued.”
Stifel cut its Hydrofarm Holdings Group Inc.’s /zigman2/quotes/223043492/composite HYFM +5.75% 2022 revenue estimate to $573 million from $595 million as it competes with promotional efforts from Hawthorne. Stifel slashed its Hydrofarm price target to $13 a share from $33.
Shares of Hydrofarm Holding are down 65.8% in 2022, but the stock rose 1.7% on Monday. Scotts Miracle-Gro shares rose 3.7% on Monday, but the stock has lost 33% so far this year.
Meanwhile, Alliance Global Partners analyst Aaron Grey on Monday cut his target price on Tilray /zigman2/quotes/226578748/delayed CA:TLRY +2.49% /zigman2/quotes/209129655/composite TLRY +0.32% to $5.50 a share from $8.00 and reiterated a neutral rating on the stock after the company held an analyst day last week.
Although the company reiterated its plan to grow revenue to $4 billion in 2024 from about $630 million in 2022, that path “embeds a number of factors outside its control” such as the legalization of adult use cannabis in the U.S. and Germany and “more rational” market conditions in Canada, Grey said.
While reaching $4 billion “could prove a difficult task” without acquisitions beyond those already embedded, Tilray offers some bright spots, such as 12 consecutive quarters of Ebitda and positive cash flow on the horizon, plus its strategy of adding “self-sustaining” businesses in the U.S. such as its beverages as it awaits catalysts for more growth, Grey said.
Shares of Tilray rose 2% on Monday. The stock is down 27.7% so far this year.
Overall, stock performance in the cannabis sector remains weak. The AdvisorShares Pure Cannabis ETF /zigman2/quotes/220307682/composite MSOS +5.61% has lost 41.2% of its value in 2022, compared to a drop of 20.3% by the Nasdaq. The Cannabis ETF /zigman2/quotes/213173823/composite THCX -2.35% has dropped 33.4% so far in 2022.