Revenue growth for some of Canada's largest cannabis suppliers exploded year over year in the first quarter of 2019 as companies booked higher sales to the recreational market during the first full quarter following legalization in the country, according to an analysis by S&P Global Market Intelligence.
Share prices for most of the major Canadian cannabis firms have also grown as the companies post revenue gains. Of the biggest firms, at least four have outperformed the S&P 500 in the 52-week period ending July 30, while at least one did worse. Meanwhile, a relatively small but growing number of Canadians are using legal cannabis as new consumers enter the burgeoning legal market, according to Canadian government data.
Revenue growth continues to sprout
Five companies, including those with strong ties to large-scale consumer firms, reported a combined C$117.3 million in recreational cannabis sales to Canada's legal market during the first few months of 2019, according to a review of earnings statements for the firms' most recent fiscal quarters, ranging from a close date of Feb. 28 to April 30, and released throughout May and June.
In the previous quarter, Canadian cannabis companies saw recreational revenue hit C$110 million in the wake of legal sales that began on Oct. 17, 2018. Under Canadian law, companies can supply fresh or dried cannabis plants or oils to private retailers that hold government-licenses. Cannabis edibles, beverages, topicals and extracts are set to hit the legal market in December.
The continuing rise of Canadian retail sales of cannabis provides "significant headroom for current sales, even before the introduction of derivative products and supply issues still limiting selection for consumers," Jefferies Equity Associate Ryan Tomkins said in a July 22 report.
Canopy Growth Corp. maintained a leading position in the market. The Smith Falls, Ontario-based firm reported C$58.1 million in recreational-use cannabis revenue in the first quarter, up from C$57.7 million in the previous quarter.
The company boosted the average price per gram equivalent of recreational cannabis to $7.28 excluding taxes during the quarter, despite selling less cannabis to the market than some analysts expected, GMP Securities Analyst Ryan Macdonell said in a June 24 research note. Canada taxes cannabis sales.
Corona brewer Constellation Brands Inc. is Canopy's largest investor and holds 35.7% of the firm's outstanding shares, according to Market Intelligence. In June, Constellation executives said they were "not pleased" with an $828 million loss in the value of the alcohol company's investment in Canopy during the three months ended May 31, though the brewer remains optimistic that Canopy can reach $1 billion in annual sales by the end of Constellation's next fiscal year in early 2021.
The comments came just weeks before the departure of Canopy Co-CEO and Chairman Bruce Linton, who stepped down from his role on July 3.
Trailing Canopy was Aurora Cannabis Inc., which had C$29.6 million in recreational cannabis revenue in the first quarter, which was up from C$21.6 million in the previous quarter. Aurora announced July 18 it was the sole the winner of the Italian government's public tender to supply medical cannabis in Italy. The firm has made a series of acquisitions in 2019, including its deal in June with Hempco Food and Fiber Inc., a hemp food products manufacturer and seller.
HEXO Corp., which has partnered with the beer giant Molson Coors Brewing Co., reported C$11.9 million in recreational cannabis revenue, a drop from the C$12.2 million the Gatineau, Quebec-based firm had in the previous quarter. In May, HEXO closed on a C$263 million all-stock acquisition of Toronto-based Newstrike Brands Ltd., the parent company of a cannabis producer.
Beyond Canada, HEXO aims to launch products in eight U.S. states in 2020 and the company has said it is in talks with 60 Fortune 500 companies on potential relationships that could help HEXO leverage its entry into the U.S. market, Tomkins, the Jefferies analyst, wrote in a June 13 research report.
As with the previous quarter, Cronos Group Inc. did not break out recreational cannabis revenue from the C$6.5 million in total revenue for the first quarter. The company is backed in part by U.S. tobacco titan Altria Group Inc., which took a 45% stake in Cronos in a C$2.4 billion deal.
Cannabis stocks continue to grow
The top cannabis stocks continued their rapid bloom in the first quarter but at a slower clip than the previous quarter.
Cronos again led the way with a stock price that grew 139.2% in the one-year period that ended July 30. That was a slower rise than the 240.6% spike it saw in the one-year period that ended April 5.
In the year through July 30, the S&P 500 rose by 9.7%. Canopy saw its stock jump 29.1% during the same time. On the low end, Aphria saw its stock fall by 35.2%.
Canadian consumers steadily warming to cannabis
As Canada’s recreational cannabis market takes shape, a relatively small but growing number of Canadians are using legal cannabis.
In the first quarter, 5.2 million Canadians, or about 18% of the population, used cannabis any time within the quarter, up from 4.2 million people, or 14% of the population, in the same quarter of 2018, months before legalization took effect.
Even with the rise, 82% of Canadians polled in the first-quarter survey said they do not use cannabis, according to government data.
Meanwhile, the legal supply is making inroads on the black market. Legally sourced product accounted for 47% of cannabis used in the first quarter, which is up from 23% in the year-ago period and more than the 38% of cannabis that came from an illegal source during the first quarter.
This article is part of S&P Global Market Intelligence's ongoing coverage of the fast-evolving cannabis industry. Check out other articles highlighting the rise in investor interest in cannabis companies and U.S. regulators holding the first hearing on products containing cannabidiol.