Today we kick off with a look at how Donald Trump’s promises over the first 100 days of his presidency may affect the markets, in our Your Stock Our Take Segment we review a viewer question on a leader in the high flying Canadian Marijuana segment, Canopy Growth Corporation (CGC:TSX). And our Star of the week we review electrical weapon and body camera manufacturer TASER International Inc. (TASR:NASD) – another stock that received a Trump Bump this past week.
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Now, let’s dig into the show.
I would like to welcome again, my co-host, KeyStone’s Senior Equity analyst, father of 1, and a man who, unbeknownst to him, has been elected to take KeyStone’s entire office to the Grey cup later this Month – if his BC Lions beat the juggernaut Calgary Stampeders this Saturday, , Mr. Aaron Dunn.
TRUMP Q&A
It’s time for this week’s Star
TASER International Inc. (TASR:NASD)
TASER International, Inc. operates through two segments, TASER Weapons and Axon. Through TASER Weapons it develops, manufactures, and sells conducted electrical weapons or (CEWs) worldwide. The company’s CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. Delivering the type of shock much of the world felt when they woke up last Wednesday to the idea that Donald Trump would be the new President of the United States of America.
TASER’s Axon brand includes a growing suite of connected products and services from body cameras and digital evidence management tools to mobile apps.
Between – November 9-10th the company’s shares surged 18% – coincided with 2 events – the first – the Trump win and the second, and more sustainable push came from the release of the company’s third-quarter results which showed continued growth in both TASER weapons and Axon body cameras.
Beating Wall Street’s expectations as TASER did in its third quarter, can often lead to a large move in a stock.
Let’s take a look at the Q3 numbers.
The financial results for TASER International as a whole are strong, but it’s the underlying revenue and earnings drivers that continue to improve each quarter.
· Weapon sales jumped 34% to $52.9 million, and gross margin improved 40.2% to $38.0 million. As the biggest revenue driver today, weapons are really the reason for the company’s results.
· The present in TASER International’s results is driven by weapons, but the future belongs to the Axon body camera segment. Axon revenue was up 74.5% to $18.9 million, and gross margin improved from 36.8% a year ago to 45.4% in the quarter.
· Within Axon, service revenue driven by Evidence.com subscriptions jumped 179% to $8.7 million. And the gross margin in this booming business is 81% right now. Before long, this will be the driver of bottom-line growth at TASER International because most Evidence.com subscriptions come with a multiyear contract from law enforcement agencies.
· Bookings for body cameras and services were up 55.8% year over year to $57.5 million, but they fell from $72.0 million a quarter ago. Total future contracted revenue stood at $302.0 million. The number of bookings will likely be volatile, but investors should watch for general momentum moving higher.
· The other good news is that 89% of Axon bookings came with a multiyear contract. That’ll keep service revenue growing, and that’s a very high-margin business long term.
The growth is great, but what are we being asked to pay for the growth – this is where we get to the valuations.
Valuation Measures
| Market Cap (intraday) 5 | 1.46B |
| Enterprise Value 3 | 1.37B |
| Trailing P/E | 96.38 |
| Forward P/E 1 | 57.04 |
| PEG Ratio (5 yr expected) 1 | 2.87 |
| Price/Sales (ttm) | 6.03 |
| Price/Book (mrq) | 10.33 |
| Enterprise Value/Revenue 3 | 5.65 |
| Enterprise Value/EBITDA 6 | 39.24 |
Classic case of what looks like to be a good growth company in a strong sector, but it is not trading at an attractive price – particularly following the Trump Bump.
The stock is priced to relatively perfection – as if it will continue to grow earnings at 50-75% – this is very, very difficult, even for the best of the best.
Its performance over the past week earns the stock the coveted status of our Star of the Week, but we caution listeners that at current prices you are paying a steep premium for this growth stock. We would look for a 20% plus pullback before the stock became more reasonably priced.
Your Stock Our Take
Sent in by Craig Sadler from Halifax.
Canopy Growth Corporation (CGC:TSX)
Canopy Growth is a leading cannabis company, offering diverse brands and curated cannabis strain varieties in dried and oil extract forms. Through its wholly-owned subsidiaries, Tweed, Tweed Farms, and Bedrocan Canada, Canopy Growth operates three state-of-the-art production facilities with over half a million square feet of indoor and greenhouse production capacity.
Second Quarter Fiscal 2017 Highlights
· Revenue of $8.5 million; a 22% increase over first quarter fiscal year 2017 and 245% over the three-month period ended September 30, 2015
· Over one metric ton sold in the quarter, specifically 1,169 kilograms and kilogram equivalents, representing an increase of 19% over first quarter fiscal year 2017 and an increase of 267% over the second quarter fiscal year 2016
· Harvested 1,711 kilograms during the second quarter ended September 30, 2016
· Net income for the quarter ended September 30, 2016 was $5.4 million, so the company appears profitable on first glance, but the numbers include a non-cash unrealized gain on changes in the fair value of biological assets of $16.1 million, compared to net income of $3.9 million in same period last year, including a non-cash unrealized gain on the change in fair value of biological assets totaling $12.5 million
In reality, the company posted a sizable loss.
Election Effect
Canopy was a $4 stock at the beginning of October. Today it is trading at $12.60 per share and now boasts a market capitalization of nearly $1.5 billion.
The rally picked up steam in the wake of the U.S. election as investors bet Canopy could benefit from the wave of pot-positive votes in a number of U.S. states.
California, Nevada, Maine, and Massachusetts just voted to legalize recreational marijuana and join Oregon, Alaska, Washington, Washington D.C., and Colorado, where recreational sales are already permitted.
Florida, Arkansas, and North Dakota all voted in favour of legalizing cannabis use for medical purposes, bringing the total number of states that will allow medical use to 30.
The end result means nearly 25% of Americans live in states that will allow the recreational use of marijuana. That’s a huge potential market, and the reason why cannabis stocks are attracting so much attention.
Valuations:
The underlying fundamentals have completely decoupled from the stock’s incredible market cap. Currently, analysts are forecasting the pot market to hit estimated peak sales of $5-8 billion in 2020 and beyond (including recreational and medicinal); that’s if legalization goes off without a hitch.
Canopy, has rallied some 320% since August and is trading at a market cap of $1.5 billion, or 25-35% of the “dream scenario” peak market. While its growth prospects are admittedly strong (for example, its patient base increased 430% between 2015 and 2016 from 2,900 to 11,600), this market cap warrants an extremely bloated valuation that can’t be justified by even the most bullish forecasts.
The stock is trading in the range of 70 times revenues.
Even if we put a generous 10 times multiple on next year’s expected revenues – remember, I am quoting revenues here, not profits (as we are often able to buy solid growth stocks at 10-15 times multiples of earnings), the stock is worth somewhere in the $5-$6.5.
What’s the bottom line?
The long-term potential for the industry is certainly enticing, and Canopy is enjoying its position as a leader in the early innings of the game.
As such, I can understand the excitement. At this point, though, I would stay on the sidelines and wait for a pullback. Growth story or not, Canopy looks too risky at the current level.
