- By GF Value
The stock of Canopy Growth (NAS:CGC, 30-year Financials) appears to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $32.06 per share and the market cap of $12.3 billion, Canopy Growth stock is believed to be possible value trap. GF Value for Canopy Growth is shown in the chart below.
Warning! GuruFocus has detected 5 Warning Signs with CGC. Click here to check it out.
CGC 15-Year Financial Data
The intrinsic value of CGC
Peter Lynch Chart of CGC
The reason we think that Canopy Growth stock might be a value trap is because its Piotroski F-score is only 2, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Canopy Growth has a cash-to-debt ratio of 2.07, which is in the middle range of the companies in Drug Manufacturers industry. The overall financial strength of Canopy Growth is 5 out of 10, which indicates that the financial strength of Canopy Growth is fair. This is the debt and cash of Canopy Growth over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Canopy Growth has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $380.1 million and loss of $4.873 a share. Its operating margin is -158.09%, which ranks worse than 85% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks the profitability of Canopy Growth at 3 out of 10, which indicates poor profitability. This is the revenue and net income of Canopy Growth over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Canopy Growth is 50.7%, which ranks better than 92% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -825%, which ranks in the bottom 10% of the companies in Drug Manufacturers industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Canopy Growth's return on invested capital is -15.72, and its cost of capital is 12.27. The historical ROIC vs WACC comparison of Canopy Growth is shown below:
In conclusion, The stock of Canopy Growth (NAS:CGC, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Drug Manufacturers industry. To learn more about Canopy Growth stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.