Canopy Growth (CGC 3.57%) released its third-quarter results on Feb. 14, which gave investors a pleasant surprise as the company posted an impressive net revenue figure of 124 million Canadian dollars. An increase of more than 49% from the prior-year quarter, it was a surprise result, especially given some of the poor performances investors have seen from other cannabis companies of late.
But in addition to just sales growth, there were four other numbers that stood out, making the earnings report look even better.
1. Gross profit of 33.8% is a big improvement
Canopy Growth generated a gross margin (before fair-value adjustments) of CA$41.8 million in Q3, which was nearly double the amount it earned during the same quarter last year. Its sales, however, didn't double. And in the company's second-quarter results, earlier this year, Canopy Growth had a negative gross profit figure as costs related to restructuring and other adjustments, as well as some facilities not yet being fully up-and-running, hurt its margins.
Not only is it a good sign that Canopy Growth is returning to some stability, it's impressive that margins are able to stay above 30% while Canopy achieves strong sales growth, especially as the gap between legal and illegal pot prices in Canada continues to widen.
2. Operating expenses rose by just 34%
One thing that's always important to look at when analyzing a growth stock is the rate at which operating expenses increase. If a company's expenses are outpacing the rate at which its sales are rising, then the net result will be a worse bottom line. And with Canopy Growth's sales growth of 49% being far and away higher than the 34% year-over-year increase in operating expenses, it's another good sign that the company is making strides in the right direction.
It's especially important now, because in prior quarters Canopy Growth benefited from sales growth looking impressive against quarterly results when the recreational pot market wasn't yet legal in Canada. That's not the case anymore, making it more challenging for sales growth to outpace how quickly costs are rising. Its growth rate today provides an apples-to-apples comparison, which makes it more relevant when analyzing other parts of the company's income statement.
3. The company paid down CA$113 million in long-term debt
Typically, cannabis investors see companies taking on debt or issuing shares to raise cash. However, Canopy Growth is in a strong enough position that the company is able to put cash toward paying down its debt and improving its financials.
Over the past nine months, Canopy Growth spent CA$113 million on repaying long-term debt compared to just CA$3 million over the same period a year ago. As of the second quarter, Canopy Growth paid down CA$104 million, meaning that in Q3 it paid down an additional CA$9 million.
Its total long-term debt has gone from CA$842 million as of March 31, 2019 to CA$536 million by Dec. 31, 2019. By bringing down debt, Canopy Growth has more flexibility moving forward and has room to raise more funds should it need to take on debt to fund more growth.
4. CA$43 million boost to the bottom line was more modest
Another pleasant surprise on Canopy Growth's financials was how less volatile they were during the quarter. In Q3, the company recorded unrealized fair value gains which totaled CA$18 million and its other income of CA$25 million added a total of CA$43 million to the company's pre-tax earnings during the quarter. At the same time last year, Canopy Growth benefited from a CA$227 million boost to its bottom line, largely coming from other income, which again was mainly due to changes in fair values.
The reason this is important is that these significant fluctuations can have a negative impact on the quality of the company's earnings and that can make it difficult to predict Canopy Growth's future performance, which, in turn, may turn away long-term investors.
The steadier the company's financials are and the less noise on them, the more investable the stock will be.
Is Canopy Growth a buy?
With these results, Canopy Growth is reminding investors why it's the industry leader and why it stands apart from its competitors. While it's not a cheap stock to own, trading at a valuation of more than 25 times its sales, it's still one of the safer investments in the industry today. In light of its strong performance, it's unlikely the marijuana stock will fall down to lower multiples, anyway.
For investors who want to take advantage of the industry's growth opportunities, particularly in Canada, it's hard to go wrong with Canopy Growth.