2 medical marijuana stocks to buy

Canopy Growth is a diversified cannabis company engaged in growing and distributing medical marijuana products to patients across Canada. Mettrum Health Corp. is also a producer of medical cannabis and cannabis products. PI Financial analysts give both healthcare stocks a ‘buy’ with ‘speculative risk’ rating.

Licensed medical marijuana producer Canopy Growth Corp. (TSX—CGC) reached new highs, including sales exceeding one tonne, yet again during the second quarter of its 2017 fiscal year.

The healthcare stock reported quarterly (period ended Sept. 30, 2016) revenue of $8.5 million, up 245 per cent from the same period in fiscal 2016. Canopy sold a total of 1,169 kilograms (or 1.169 metric tonnes) of marijuana during the second fiscal quarter, and harvested 1,711 kilograms as well.

These exceptional results generally paralleled PI Financial analysts Jason Zandberg’s and Devin Schilling’s expectations. The analysts had forecast $8.5 million in revenue and marijuana sales of 1,210 kilograms.

According to the analysts, fiscal second-quarter operating costs rose 44 per cent to $7.9 million compared to fiscal 2017 first-quarter costs of $5.5 million. They say this was due to higher costs in sales and marketing (up $600,000), research and development (up $100,000), acquisitions (also up $600,000), and general and administrative costs (which rose $1.2 million).

Messrs. Zandberg and Schilling nevertheless note that this healthcare stock has kept up with the analysts’ aggressive growth expectations. Its average cost of production should decline in future quarters since its Tweed Farms greenhouse operations are in full production, they add.

The analysts have slightly raised their revenue growth rate expectation for the next couple of fiscal years. Thus, their revenue forecasts also increase.

They predict revenue of $37.9 million for fiscal 2017, $100,000 more than before, and $84.6 million for the following fiscal year, previously $76 million.

Citing upcoming legislation legalizing recreational marijuana in Canada, and the growing acceptance of cannabis in the United States, the analysts say they believe there is some upside to their market forecast of $4.6 billion in 2019.

The analysts say they expect Canopy to be among the market leaders and raise their 12-month target price for the grower to $12 a share, previously $7. They have maintained a ‘buy’ recommendation and ‘speculative’ risk rating.

Canopy management reported that Tweed Farms yielded about 750 grams of marijuana per plant in the recent fiscal quarter. The analysts estimate the inventory is worth $40 million to $50 million after the crop’s harvest.

“The large inventory is a competitive advantage for CGC given industry supply across the medical marijuana sector is currently very tight with some competitors unable to fulfil demand,” say Messrs. Zandberg and Schilling.

Medical cannabis production rising to meet demand

In an earlier July, 2016 research note, Messrs. Zandberg and Schilling had initiated coverage of another medical marijuana stock, Mettrum Health Corp. (TSXV—MT), with a ‘buy’ recommendation and a 12-month target price of $3.50 per share.

At the time the analysts said that Mettrum had developed strong relationships with physicians and clinics, and they started coverage of the healthcare stock due to the company’s growth potential. The company had a roster of 12,099 patients at the conclusion of June, second only to Canopy Growth’s 16,000-plus patients.

They noted that Mettrum had plenty of opportunities to grow more plants indoors using modular technology on 80 acres of zoned property.

Fast forwarding three months later, Messrs. Zandberg and Schilling reviewed Mettrum’s second quarter results for fiscal year 2017. They say that revenue was up to the tune of 180 per cent to $4.8 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) came in at -$1.1 million versus -$2.1 million a year ago, and earnings per share came in at -$0.05 compared to -$0.06 in the year-earlier quarter.

“We had modelled revenue of $4.7 million in the second quarter and EBITDA of $500,000,” say the analysts. “Mettrum’s patient count at the end of the quarter was 15,330, slightly ahead of our expectation of 14,520 although patient count is becoming an unreliable data point as patients register with multiple licensed producers.”

During the quarter, Mettrum sold 480,000 grams of medical marijuana, which was less than the 524,000 that the analysts projected.

“Demand for product was strong during the quarter and Mettrum stated that it did require buying third-party product to satisfy that demand,” say the analysts. “Moving forward, we expect Mettrum to be able to satisfy demand through its own production as Bowmanville South expands.”

The analysts keep their ‘buy’ recommendation, with ‘speculative’ risk, and they boost their 12-month target price to $8 per share from $4.25 per share.

 

This is an edited version of an article that was originally published for subscribers in the December 23, 2016, issue of Investor’s Digest of Canada.You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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