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Investors run out of patience on pot profits

(Gerald Herbert/Associated Press)

It’s the busiest week of the quarter for cannabis earnings, and investors appear prepared to generously reward companies that show they can turn a profit and punish those that don’t.

Key companies to report this week include Canadian licensed producers Canopy Growth Corp. and Tilray Inc. and US multi-state operators Acreage Holdings Inc., Charlotte’s Web Holdings Inc., and Trulieve Cannabis Corp.

“Names who can show a route to profitability (or are there now) have the greatest likelihood attracting near-term investor interest,” Jefferies analyst Ryan Tomkins said in a note.

This will be particularly important for Canopy, which fired Co-Chief Executive Officer Bruce Linton in July after posting a net loss of $323 million Canadian ($245 million) and an adjusted loss before interest, taxes, depreciation, and amortization of $98 million Canadian in its fiscal fourth quarter.

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Investors shouldn’t expect immediate profitability from Canopy, which is still searching for a new CEO, said Eight Capital analyst Graeme Kreindler.

“Though we see no clear path to positive Ebitda in the near term, we do see potential for WEED to begin to focus more on profitability and growth of core business operations moving forward given our expectation that WEED will take a new strategic direction as it brings in a new CEO,” Kreindler said in a recent note, referring to Canopy by its Canadian stock ticker. He doesn’t expect Canopy to report positive Ebitda until the third quarter of calendar 2020.

Profit rewarded

Aphria Inc. is the most striking example of the potential upside for companies that outperform analysts’ expectations. The stock soared 40 percent on Aug. 2 after it became the first large Canadian pot company to report a net profit, as results beat estimates on virtually all metrics.

Another indication of the hunger for profitability is Aurora Cannabis Inc., which gained 8.2 percent last Tuesday when it said it “continues to track towards positive adjusted Ebitda, and in particular adjusted Ebitda from cannabis operations.” This actually appeared to be a bit of a climb-down from earlier statements that it would achieve sustained positive Ebitda by the quarter ended June 30, but investors seemed pleased to simply hear the word “positive.”

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Cronos Group Inc., meanwhile, has lost 7.3 percent since it reported a wider Ebitda loss and said it expects that metric to worsen in the back half of the year as it prepares to launch new

products in Canada and the United States.

Market share

Market share will be another interesting theme to watch after CannTrust Holdings Inc. moved to halt all sales and shipments of its products in the wake of a regulatory breach. About 95 percent of CannTrust’s products are now out of stock, according to a survey of pot supply levels in five Canadian provinces by Cowen & Co. analyst Vivien Azer.

Canopy appears to be the biggest gainer from CannTrust’s woes, adding more products to store shelves than any of its competitors between July 8, when CannTrust announced the breach, and Cowen’s latest survey on Aug. 5. Canopy has about 20 percent market share, the most of any producer, Azer said.

Total out-of-stock rates in the five provinces rose to 57 percent from 52 percent previously.