Can Cannabis Therapy Drive Canopy Growth's (CGC) Q2 Earnings?

Canopy Growth Corp (NYSE:CGC) is scheduled to report second-quarter fiscal 2020 results on Nov 14, before market opens.

In the first quarter of fiscal 2020, the company's loss per share of 23 cents was narrower than the Zacks Consensus Estimate of a loss of 29 cents. The company, however, missed estimates in three of the trailing four quarters, the average negative surprise being 276.2%.

Let's take a look at how things are shaping up prior to this announcement.

Factors at Play

Over the last few quarters, Canopy Growth has been seeing a robust performance by its key business segment cannabis therapy.

In May 2019, the company acquired Europe's largest cannabinoid-based pharmaceutical manufacturer C3 along with five approved cannabinoid therapies. Further in June, the company took over Saskatoon-based bio-product extractor KeyLeaf Life Sciences to support the company’s U.S. cannabidiol (CBD) expansion. These acquisitions are expected to have significantly contributed to the company’s top line in the fiscal second quarter.

The company also bought This Works, a global leader in natural skincare and sleep solutions, which strategically strengthened Canopy Growth’s position in the market and enabled it to offer CBD-based products. This transaction is also likely to have benefited the company in the fiscal second quarter.

Of late, the company expanded its product portfolio through solid investments. It has been spending adequately on cultivation and post-harvest processing capacity. During the last reported quarter, in terms of sales volume, the company sold 9,060 kilogram and kilogram equivalents into direct channel, accounting for 14% growth sequentially.Of the total sales, 7,673 kilograms were dry cannabis, reflecting an increase of 94% from the reported figure in fourth-quarter fiscal 2019. Sustenance of this trend might again get reflected in the to-be-reported results.

The company continues to invest in various extraction and advanced manufacturing capabilities for further automating its processes and laying the groundwork for the next batch of product platforms. Canopy Growth has been building its CBD platform in the United States and accelerating its investments in markets beyond North America. These investments might reflect on the upcoming quarterly release.

In the last reported quarter, the company suffered a drop in gross margin, attributed to operating expenses incurred for facilities that are not yet cultivating or processing cannabis or producing cannabis related products or facilities with underutilized capacity. We expect that this trend has most likely continued in the fiscal second quarter as well.

Trend in Q2 Estimates

For second-quarter fiscal 2020, the Zacks Consensus Estimate for total revenues of $77.1 million implies growth of 331.9% from the prior-year reported figure. Also, the consensus estimate of a loss of 27 cents indicates 64.5% narrower-than-estimated loss from the year-ago reported figure.

What Our Quantitative Model Predicts

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise. This is exactly the case here as you will see below.

Earnings ESP: Canopy Growth has an Earnings ESP of +11.50%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Canopy Growth carries a Zacks Rank #3.

Other Stocks Worth a Look

Here are a few other medical stocks worth considering as these have the right combination of elements to also beat on earnings this reporting cycle.

Eyenovia, Inc. (NASDAQ:EYEN) has an Earnings ESP of +10.50% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Merus N.V. (NASDAQ:MRUS) has an Earnings ESP of +10.00% and a Zacks Rank of 3.

Prevail Therapeutics Inc. (NASDAQ:PRVL) has an Earnings ESP of +4.48% and a Zacks Rank of 2.

5 Stocks Set to Double

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