A consistent theme in the cannabis coverage of Echelon Wealth Partners analyst Russell Stanley is his assertion that American pot stocks are cheaper than their Canadian peers.
Today, the analyst expanded on that theme with a coverage initiation of MedMen Enterprises (Quote, Chart CSE:MMEN).
Stanley Thursday launched coverage of MMEN with a “Speculative Buy” rating and a one-year price target of $7.25, implying a return of 34 per cent at the time of publication.
Stanley outlined the operations of the company, which is based in Los Angeles and employs more than 800.
“MedMen Enterprises operates cultivation, production and retail/dispensary operations in key markets in the US, with a focus on states offering strong demand combined with high entry barriers that constrain product supply,” the analyst says. “It currently has interests in California, New York, Florida, Nevada and Massachusetts, which represent an aggregate population of 90M people. Its operations are vertically integrated to enhance margins and ensure overall control of the supply chain.
Stanley says facility location, particularly with regard to dispensaries, has become increasingly important. He says the MedMed team takes a systematic and rigorous approach to identifying high value locations, and says they have done so in important states such as California, New York, Florida and Nevada.
The analyst thinks MMEN will generate EBITDA of negative $39.2-million on revenue of $29.8-million in 2018. He expects the company will improve those figures to EBITDA of $10.7-million on a topline of $181.9-million the following year.
Stanley quantified the valuation gap between Canadian and American operators.
“Cannabis companies that are operationally focused on the US now trade at an approximate 69% discount to the multiples given to companies focused on the Canadian market,” he said. “Despite the recent strong performance by a number of US-focused stocks, this discount is testing prior highs because of significant multiple expansion amongst Canadian companies, following the $4B investment made by Constellation Brands in Canopy Growth Corporation last month. We view the discount as unjustifiably high, particularly given the improving US federal sentiment towards cannabis, and we therefore expect quality US names to outperform.”
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