While the stock market is still focused on the large Canadian cannabis LPs listed on major U.S. stock exchanges, several U.S. multi-state operators (MSOs) are set to shock the market with industry leading positions. These companies are set to combat the Canadians for the largest operations without the help of major investments or even Federal approval of cannabis.
Both Canopy Growth and Aurora Cannabis, which grab the vast majority of investor headlines, are set to generate quarterly revenues in the $60 million to $80 million range for the December quarter. Yet, some of the MSOs are set to blow past these numbers.
The U.S. MSOs operate in the largest cannabis market in the world, which forecast to derive greater than 50% of the global market, at least through 2023. While the global cannabis market is expected to grow from an estimate of $24.4 billion in 2019 to $52.5 billion in 2023, the U.S. market alone is forecast to more than double from $12.5 billion last year to $25.7 billion in 2023.
The U.S. market is forecast to account for nearly 53% of the global cannabis market in four years making the opportunity to focus on U.S. alone the best opportunity for a cannabis company to profit.
We’ve delved into these three U.S. MSOs with operations set to shock the world with their scale and size. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to give us an idea of what the Street thinks is in store for the trio in the year ahead.
Curaleaf (CURLF)
The market virtually ignored Curaleaf finally closing the acquisition of Select brands from Cura Partners last week. The deal provides an extensive wholesale distribution system for the Select brand products in California and other western states.
With the regulators signing off on the deal finally, investors will see far less risk to the investment story and the likelihood of closing the crucial Grassroots deal to gain access to Illinois. The state of Illinois just announced the first month of recreational sales reached nearly $40 million and Grassroots is a major part of the growth story in that key state.
In the prior quarter, Curaleaf reported pro-forma revenues of $129 million or the equivalent of C$172 million. If they were a Canadian LP, the stock valuation would far exceed the Canadian stocks versus the current projected market valuation of only $4.7 billion.
In addition, Beacon Securities analyst Russell Stanley recently predicted Curaleaf would reach annual sales of $2.1 billion in 2021 with EBITDA profits of $899 million based on 42% margins. To place these numbers in perspective, analysts have Canopy Growth with an $8 billion market cap not topping $1 billion in sales until FY22 ending in March.
The company is in line to have operations in 19 states with licenses for 131 dispensaries and 1,150 wholesale partners. In addition, the company has a massive 1.4 million square feet of cultivation capacity with the ability to expand to 2.3 million square feet.
TipRanks’ data shows a bullish camp backing this MSO. The ‘Strong Buy’ stock has amassed 6 ‘buy’ ratings in the last three months, with just one analyst playing it safe with a hold rating. The 12-month average price target stands tall at $8.43, marking over 30% in return potential for the stock. (See Curaleaf's price targets and analyst ratings on TipRanks)
Green Thumb (GTBIF)
Green Thumb Industries isn’t a household name in the cannabis space or busy making large-scale deals, yet the company is targeting December quarter revenues of $75 million or the equivalent of nearly C$100 million. The stock only has a market cap of $2 billion when Canadian companies generating half those revenues top this market valuation.
In the last quarter, Green Thumb generated revenues of $68 million while the company will now benefit substantially from the legalization of adult-use cannabis in Illinois. At the end of January, the company opened the seventh Rise store in Illinois and 41st in the country.
The company is based in Chicago so the Illinois market should provide a big boost to the hometown company, but Green Thumb has operations far beyond Illinois. The company has licenses for 96 retail locations in 12 U.S. markets with 13 manufacturing facilities.
Analysts forecast 2020 revenues topping $460 million placing the company on par with estimates for the Canadian cannabis giants.
The analyst consensus from TipRanks tells a very similar story. Green Thumb has received 6 “buy” ratings in the last three months, with no holds or sells – a clear sign that analysts are impressed with the company’s potential. Shares sell for $8.17, and the average price target of $18.72 gives the stock an eye-opening 130% upside. (See Green Thumb's price targets and analyst ratings on TipRanks)
Harvest Health & Recreation (HRVSF)
Harvest Health & Recreation is another wild-card stock depending highly on acquisitions to top the large Canadian companies. The company has revenue targets approaching $1 billion in 2020 while analysts have revenue estimates reaching $1 billion in 2021. Either way, the MSO becomes a very large cannabis company in the next year or so.
For Q3, the company reported pro-forma revenues of $95 million. Analysts have Q4 revenue targets at only $41 million due to acquisitions not closing. Harvest Health is reporting adjusted EBITDA losses, but the company expects to become EBITDA positive after closing the pending deals in 2020. The cannabis company projects 10% EBITDA margins reaching 20% margins in 2020.
The company has a lawsuit with pending acquisition target Falcon International causing a cloudier view of the stock due to the $50 million breakup fee, but Harvest Health has other deals in the work including the recently announced deal for Have a Heart CC. The deal includes 11 operating dispensaries in California, Washington and Iowa and licenses for another seven locations in California.
The MSO is positioned for operations in 13 states with over 130 retail locations and 80 manufacturing sites. The company has missed out on the Illinois recreational legalization, but Harvest Health is positioned for other markets like Arizona and Florida legalizing recreational cannabis use.
Harvest Health projects having 487 million shares outstanding after mergers close providing a fully diluted market valuation of below $1.5 billion with the legitimate targets of reaching the $1 billion revenue level prior to the large Canadian cannabis stocks.
At just $2.53, Harvest Health shares are another bargain for return-minded investors. The stock’s $10.17 average price target implies over 300% upside, and the analyst consensus of Strong Buy is based on just four ratings, which were given in the past three months. (See Harvest Health's price targets and analyst ratings on TipRanks)
Aurora Cannabis (ACB) announced it was going to cut 500 jobs, with 25 percent of them being corporate positions, while taking impairment charges of about $752.79 million. It also announced CEO Terry Booth would be stepping down from his position, with executive chairman Michael Singer taking over leadership of the company until a new CEO is found.
In this article we'll look at what Booth stepping down could mean for the strategy of the company going forward.
Long-Term Position on Cash Infusion
The position of Aurora Cannabis for some time has been to resist the idea of getting a huge cash infusion from a larger firm, which would result in losing control of company.
With Chief Commercial Officer Cam Battley being forced to step down in December, this could result in significant changes to its former resistance to losing some, if not all control, of the company going forward, assuming a large suitor takes in interest in the company while it has lost a lot of its valuation; it could take a position and control for a lot less than it could have even a couple of months ago.
I think the key there will be how Nelson Peltz feels about the future prospects of Aurora, and if it remains viable or desirable to continue to go it alone.
Nelson Peltz Factor
In March 2019, Nelson Peltz was taken on as a strategic adviser by Aurora, which also granted him 20 million stock options he can acquire at C$10.34 each.
The assumed primary purpose in bringing on Peltz was to help open doors for partnerships with larger consumer packaged-goods companies, without giving up control via large cash infusions.
One of the major disappointments for Aurora since that announcement has been the failure of Peltz to deliver any type of deal that would have changed the performance of the company, even as the Canadian government dropped the ball on rolling out retail stores.
The big question in the months ahead is whether or not Peltz changes his mind concerning the control factor and decides to push for an agreement with a large company interested in taking a significant position in Aurora at a bargain price.
It wouldn't even surprise me if a company, knowing the future prospects for Aurora, were to make a bid to acquire it altogether.
Some may think of the debacle surrounding Constellation Brand's investment in Canopy Growth, citing resistance to acquiring Aurora because of the write-downs Constellation has had to take because of the weakness now inherent in the cannabis market.
The point is, with Battley and Booth out of the way, it's almost certainly on Peltz as to whether or not the company is going to change its mind on seeking an investment from another firm, or believes it can continue to go it alone.
Peltz can be aggressive, and if he doesn't want it to happen, I don't think it will. On the other hand, if he pushes for it, the doors will open for a perspective suitor.
The main issue here is if things don't go the way Peltz wants them to, it could result in litigation that few companies would want to engage in, taking into consideration it could take several quarters before Aurora starts to turn around in a meaningful way.
Consensus Verdict
Caution roars loud on Wall Street analysts surveying the challenged cannabis giant’s prospects. Out of 16 analysts tracked in the last 3 months, only 2 are bullish, while 9 remain sidelined and 5 say "sell." Yet, the stock’s consensus price target stands tall at $2.34, which implies about 50% upside from current levels. (See Aurora stock analysis on TipRanks)
Conclusion
No investor should consider taking a position in Aurora because of a possible acquisition, or even a potential partnership deal with some packaged-goods companies.
Under current Canadian cannabis market conditions, it would be best to wait until anything like that is announced, than to take on the risk in the short term. The short-term risk/reward isn't worth it at this time.
We still have to wait and see if Ontario really does aggressively roll out stores in the last three quarters of 2020, as it has stated it will. If it doesn't, there really isn't much Aurora can do to turn things around this year.
Selling derivatives will help some, but until the new stores are rolled out, the company is only selling into the existing Canadian market. More stores to sell in, along with the potential of derivative sales and new customers, is the key to its success until the international medical cannabis market increases in size.
For these reasons, I remain bullish on Aurora Cannabis over the long term, but will wait until the earnings report for the first calendar quarter of 2020 to see how derivatives are doing for the company, and in the second calendar quarter, whether or not Ontario is starting to add a lot more retail outlets.
If the company does publicly signal a willingness to listen to offers from companies wanting to take a large position in it in exchange for cash, it could be a huge catalyst beyond its general performance.
The company is in a holding pattern until the above questions are answered.
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