Preliminary Analysis Case Study #1 Part 4 – Operating Margin and SG&A

Last week, I announced we were going to begin doing a real-world case study on Constellation Brands – Stock Ticker STZ.

Well, after releasing this post, my team reminded me that there was actually a preliminary analysis my client did before this one. So before we get to the STZ case study, we’re doing to take a detour to talk about Canopy Growth Corp –  Stock Ticker WEED.

I didn’t want to skip this one because there’s a lot of context and talk in this discussion that we don’t necessarily go over in the later training sessions because we’ve already talked about them.

This post is a continuation of the last posts in this ongoing case study.  All other parts are below:

• Preliminary Analysis Part 1
• Preliminary Analysis Part 2
• Preliminary Analysis Part 3

Below is his unedited preliminary analysis for reference – without any of my comments – for you to get a  look at.

Canopy Growth Corp – WEED

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WEED – Canopy Growth Corp (Canadian Company)

All numbers are in millions of CAD unless noted otherwise.

• FY Ends March 31^st, 2017
• 3,404 market cap (medium)
• N/A dividend yield.
• P/B TTM = 4.92
• TTM Operating Margin is -39.2 and has somewhat increased over last 2 years.
  • 5 year average OM is N/A
• Share count has done increased from 77 to 119 from FY16 to FY17. Current TTM is 149m.  Statement of shareholder’s equity??
• Book value per share has increased from 1.34 to 1.55 from FY16 to FY17. Current TTM is 3.73.
• Morningstar ROIC TTM is -6.58 and a little higher than the last 2 FY’s
  • 5 year average Morningstar ROIC is N/A
• TTM ROE is -6.45 and a little higher than the last 2 FY’s
  • 5 year average ROE is N/A
• TTM FCF/sales is -151 and we can’t tell any pattern. See con note on FCF
  • 5 year average FCF/sales is N/A
• CCC: No info on the payable period (assume the product is cheap to grow) but DIO exploded on FY2017 to 5,494 days (FY2016 and 2015 avg is about 650 days). Research online says cannabis takes up to ½ year to grow so I would need much more investigation on why inventory takes so long to turnover.
• EV=3,312
• EV/EBIT is -73.6
• EV/FCF is -37.6
• EBIT/EV (earnings yield) -1.3%
• FCF/EV (earnings yield) -2.6%

Cons

• Young company – only about 3 years old after name change (used to be Tweed)
• Note only balance sheet on Morningstar has FY2015 so we need to look at 10K for data.  We cannot really tell any direction with a 2/3 year old history
• SG&A & Other are over 163% of Revenue
• SG&A roughly decreasing and “Other” is increasing
• Op Income and Margin are (-) but are generally decreasing over time
• Outstanding shares are significantly increasing over time
• FCF is increasingly negative as both op cash flow and CapEx are also both increasingly negative
• Not much experience with Canadian companies
• Goodwill and intangible assets exploded on FY2017
• Regulation laws in Canada and USA
• They bought a lot of companies in FY2016

Pros

• Cash exploded in FY2017
• FY2017 Cash & Equiv – Total Liabilities = $39m
• Book value/share is generally increasing but only for last 3 years
• Low Debt (also reflected by the ROE and ROIC being similar numbers)
• Revenue is increasing over time
• STZ bought about 10% interest in WEED.  Industry took notice and WEED most likely gained some legitimacy with large companies
• COGS is only 23% of Revenue (doesn’t take much cost to grow product?)
• High Working Capital Ratio = 9.8 but this high typically suggests either too much inventory or not investing excess cash…

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So, after going through the beginning’s of this preliminary analysis process in part 1 and 2 last week, here is part 3.

In this video, we talk about operating margin, selling general and administrative costs, and IPO’s.

For some reason, when I talk the audio cuts out so I’ve added narration to the video above for context.

If you have any comments or questions, please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well, so feel free to post these in the comments below.

If you’d like more information about the coaching program this client is in, go to this page.

For reference, he’s in the $ 10,000, year-long program and this is only after 1 month of coaching, doing nine 1-hour training sessions via Skype.

P.S.  This analysis is based on the preliminary analysis template I developed over a number of years, and after evaluating thousands of companies.  If you’d like a copy of this to do your own preliminary analysis, you can get yours for free here.

P.P.S.  I put on a FREE webinar on Thursday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market, so you can possibly do the same.  If you’d like to sign up for FREE to view the replay of the webinar, you can do so here.