

Recent expansion plans underscore the very plausible idea that Canopy Growth Corp. (Canopy Growth Corp Stock Quote, Chart, News: TSX:WEED) will be one of the winners in the marijuana sector, but the stock is looking pricey, says Canaccord Genuity analyst Neil Maruoka.

On September 8, Canopy announced it had finalized the purchase of a parcel of land next to its existing facility, including a 458,000 square-foot greenhouse.

“We see a long-term need for a diversified and exponentially larger footprint here in Canada balancing indoor and greenhouse growing platforms,” said CEO Bruce Linton. “Expanding the production capacity and greenhouse space at Tweed Farms allows us to continue to grow into the demand in the market, and showcase our best-in-class sun grown products.”

Maruoka says has mixed feelings about this development.

“While this could drive average production costs lower and further positions Canopy as the largest producer in Canada, we believe that industrywide planned capacity is approaching saturation, even at our peak forecasts for the recreational market,” he says. “We continue to look for LPs to differentiate their business models beyond capacity expansion in Canada.”

In a research update to clients Friday, Maruoka maintained his “Hold” rating and one-year price target of $9.50 on Canopy Growth, implying a return of 5.4 per cent at the time of publication. The analyst says the stock is looking fully valued here.

“Although we believe Canopy may well emerge as the leader of the Canadian cannabis industry, the company currently trades at 9.8x its funded capacity, at the high end of peers averaging 6.3x. Although its dominant market position may justify a premium, we believe our target price of C$9.50 continues to support current trading levels,” he says.

Maruoka thinks Canopy will generate EBITDA of $15.7-million on revenue of $120-million in fiscal 2018. He expects those numbers will improve to EBITDA of $140.6-million on a topline of $497-million the following year.