CIBC compares cannabis to gold rush, predicts ‘beginning of global seismic shift’

The birth of the legal cannabis industry in Canada is akin to the gold rush, but very few companies will live up to their lofty expectations, according to a new report from one of the country’s largest banks.

CIBC World Markets, a subsidiary of the Canadian Imperial Bank of Commerce, made the sobering assessment Friday in a report in which it also initiated coverage of Canopy Growth, Cronos Group and Aphria.

CIBC expects only a handful of players to end up dominating the global cannabis market.

“We believe Canopy and Cronos are likely to be two of those winners,” according to the report, titled, “The Beginning Of A Global Seismic Shift.”

“Meanwhile,” the report continued, “we view Aphria as a manufacturing and automation expert but believe concerns about capital allocation and corporate governance could deter investors.”

Read the full report here.

Key trends

The report highlights several key trends in the industry such as capital flows to the United States, reversing a tendency over the past year of money moving north.

“An increasing number of sophisticated investors are beginning to shift capital to U.S.-based operators,” the report said, naming as examples well-capitalized businesses such as MedMen, Green Thumb Industries, Curaleaf, Trulieve and Acreage Holdings.

“But this does not mean Canadian companies will be shut out of the U.S. market,” the report continued. “We expect capital investments and acquisitions to take place, while still remaining onside with U.S. laws.”

Derivative products are where the market is headed, the report continued.

“The concept of product mix is incredibly important in cannabis as the margin profiles can vary differently for individual products,” the report stated.

It said the focus would likely move from discussion of price and cost per gram to price and cost per serving as consumer preferences shift toward alternative products.

More mainstream, large companies also are expected to make a splash in the cannabis industry.

“Constellation Brands and Altria Group have made the first steps, but it is our opinion that the industry will see far more, as cannabis undergoes destigmatization and normalization,” wrote the report’s author, John Zamparo.

Market leaders

Which company has the best opportunity to become a global – or at least national – titan?

The CIBC predicts that will be determined by licensed producers with the strongest management teams.

“To this point, it does not surprise us that the two largest investments made to date in this industry have featured Constellation Brands and Altria, giants in the beverages and tobacco world, choosing Canopy Growth and Cronos Group,” the report stated.

CIBC did not initiate coverage of Aurora Cannabis – Canada’s other “cannabis titan.”

The CIBC report also warned that its estimates for producers’ sales and earnings before interest, tax, depreciation and amortization (EBITDA) are below the sum of consensus forecasts.

For example, the consensus for cannabis sales in 2020 is 5 billion Canadian dollars ($3.8 billion).

But CIBC sees sales coming in at just over CA$4 billion. The consensus EBITDA is about CA$2 billion, with CIBC’s estimate at roughly CA$1.2 billion.

The report highlights the importance of brands while conceding that developing recognizable ones in Canada is a challenge because of onerous regulations. Companies face restrictions on branding and packaging.

“Conversely, it’s also true that the popularity of the top brands can turn on a whim,” the report stated.

“There is an argument to be made that this presents significant risk to any company’s M&A strategy when it comes to seeking out the best targets; but an equally compelling argument can be made that this underscores the need for incredibly strong balance sheets in order to succeed.”

Cronos is traded on the Toronto Stock Exchange (TSX) and the Nasdaq under the ticker symbol CRON.

Aphria trades as APHA on both the New York Stock Exchange (NYSE) and TSX.

Canopy Growth’s shares trade on the NYSE under the ticker symbol CGC and on the TSX as WEED.

Matt Lamers can be reached at [email protected]

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9 comments on “CIBC compares cannabis to gold rush, predicts ‘beginning of global seismic shift’
  1. Flowcharts on

    Ha Ha Ha….. what a joke… they need to pump the 2 companies they have given money to so they can sell their shares before the next Earning disaster …. These companies are losing 100,00,00 Million a month.

    Reply
    • ROB on

      I totally agree, If they had stakes in some of the other Big cannabis companies the names would be different..Just trying to pump thier stocks they have money in.

      Reply
    • Maxcatski on

      Duh, how many zeros are you throwing around there, Dude? At least get the comma in the right place.

      And if you think that Canopy and Cronos are not likely to succeed, who are you picking? These two companies are at the top of their legal cannabis game.

      Reply
  2. Del Funk on

    You don’t see much in the way of detail or authenticity in the CIBC article. Why did they bother. This kind of reporting does not merit publication. CIBC should have a sit down with the author.

    Reply
  3. Maronstrike on

    What a joke! CIBC as noted in one of the replies are late coming to the party? Why?
    Well l find it comical that they would start coverage on the listed MJ companies. I’m sure we all know why. It wasn’t to long that CIBC wouldn’t touch cannabis companies with a ten foot pole. Just like some other Banks.
    Now let’s look at Bank of Montreal . They were the first to be cannabis friendly. They were the first of our banks that lent monies to these companies. So they would have first look at the books and the story of companies they received loans from them. I would guess the monies were in excess of 1 Billion and am sure they would have had to be comfortable lending to these companies.

    Now ,I would be more inclined to believe their coverage on companies they would start coverage on. CIBC have quietly put monies out late in the game and now are protecting their investment by pushing the share price of these companies. What a joke !

    Reply
  4. Monica Pua on

    Disclaimer:
    Banking people peaking into the cannabis industry and coming up with a report filled with numbers and names, cannot be considered as accurate information by any stretch of the English language.

    Reply

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