M Partners analyst Mason Brown say the Canadian marijuana legalization experience will be a “rollercoaster ride”, but says a few Canadian marijuana stocks are poised to reap the lion’s share of the benefit.
In a special report to subscribers on January 18, Brown said the beer industry is the best way to look at the way distribution of recreational cannabis in Canada.
“We view the beer industry in Canada as the best representation of the potential distribution model for recreational cannabis and that understanding the beer industry is critical to evaluating the opportunities and risks facing the Canadian LPs,” says the analyst. “In Canada, advertising, pricing, mark-up, warehousing, distribution, and sale of beer are regulated at the provincial level. Similarly, the Task Force (TF) has recommended that wholesale and retail sales of cannabis to be regulated by the provinces.”
The analyst says the landscape will be a complex one that will take a deft touch to navigate.
“Across Canada there exist interprovincial barriers to entry and structures that support local brewers. Most notably, sliding scale mark-ups or tax subsidies that increase the difficulty for out-of-province producers to enter the distribution platform and to acquire shelf space,” he says. “For most provinces, the provincial government has some level of control on the import and distribution of all out-of-province products, acting as a hub through which all product moves. While the TF recognized the need for a diverse marketplace with craft producers, we don’t believe all provinces can afford to raise strong interprovincial barriers when rec sales begin due to differences in population and production capacity between provinces. Also, the fact that Health Canada (HC) and not the provinces will continue to determine which applicants get licenses and which LPs get license increases.”
Brown says there are a handful of companies that stand head and shoulders above the rest in the quest to profit from the cultural shift towards marijuana legalization. He says these are the ones with strong balance sheets and brands that have a range of product offerings that will be equipped to capture market share with market leading distribution models, the way Molson Coors has with beer.
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The analyst highlighted three companies he has under coverage and three he does not as being uniquely qualified to win Canada’s marijuana space.
Brown says Aphria (TSXV:APH) has a quality management team with decades of greenhouse and agricultural experience and a defensible low cost production. The analyst has a “Buy” rating and a one-year price target of $7.10 on the stock, which closed Friday at $5.57.
He says Canopy Growth Corp. (TSX:CGC) has strong brand recognition and has become the “go-to” Licensed Producer for strategic transactions. The analyst has a “Buy” rating and a one-year price target of $14.40 on Canopy, which closed Friday at $10.09.
Brown says OrganiGram (TSX:OGI) has a unique tiered growing structure and a low-cost indoor structure and strong management. He has a “Buy” rating and a one-year price target of $4.40 on the stock, which closed Friday at $2.65.
Brown says three companies he does not currently cover, PharmaCan Capital Corp (TSXV:MJN), SupremePharma (CSE:SL), and Aurora Cannabis (TSXV:ACB), have long-term upside from many of the same advantages that his coverage list enjoys.