Beacon Securities analyst Doug Cooper is staying bullish on US cannabis company Lowell Farms (Lowell Farms Stock Quote, Chart, News, Analysts, Financials CSE:LOWL) after Lowell’s latest quarterly results. Cooper maintained his “Buy” rating and target price of C$5.00/share in an update to clients on August 18.
Founded in 2005 with its headquarters in Salinas, Calif., Lowell Farms cultivates, extracts, manufactures, markets and distributes cannabis products under the Lowell Herb Co brands.
Cooper’s said Lowell’s second quarter 2021 numbers were in line with the company’s guidance.
“The transformation of LOWL that started five quarters ago (when ‘agency’ and ‘third party distribution’ accounted for 50 per cent of revenues and are now down to four per cent and going lower) is accelerating, especially through the acquisition of Lowell Herb Co (Feb), the commissioning of its processing facility in Salinas (June) and the optimization of its own greenhouse,” Cooper said.
Lowell Farms reported total revenue of $15.2 million in the quarter, a 37 per cent quarter-to-quarter increase and 53 per cent year-over-year growth. The company’s flower products, including its Lowell Smokes brand, accounted for $14.5 million and 50 per cent sequential growth. (All figures in US dollars except where noted otherwise.)
The company also posted a record 43 per cent gross margin (excluding depreciation), beating its previous high of 41.6 per cent in the third quarter of 2020 and significantly outpacing the 8.1 per cent mark it posted in the first quarter of 2021.
Lowell Farms posted a positive adjusted EBITDA of $740,000 for the quarter, well ahead of the $7.2 million negative adjusted EBITDA it posted in the same quarter in 2020.
The company posted net income of $731,000 compared to net losses of $8.8 million and $6.7 million in Q2 2020 and Q1 2021, with an operating loss of $473,000 compared to losses of $4.8 million and $5.7 million in Q2 2020 and Q1 2021.
A big benefit to the company is the launch of Lowell Farm Services, which Cooper notes provides the company with access to an additional 150,000 pounds of feedstock on top of the 40,000 pounds it cultivates in its Salinas operation, which could generate upwards of $20 million in high margin revenue.
The company also recently announced a partnership with Ascend Wellness to bring Lowell Smokes pre-rolls into its eight retail locations throughout Illinois, having already sold 5,000 packs in the first nine days of the partnership, which Cooper notes is better than originally forecast as Illinois is the first state where Lowell has implemented its licensing strategy.
“We have a lot to be proud of, but I am particularly excited about the continued progress we are making at the cultivation level,” says Lowell Farms Inc. Chief Executive Officer Mark Ainsworth in the company’s August 16 press release. “We have spent a good portion of Q2 dialing in our automated environmental systems to continue to reach increased yields and potencies and right now we are collecting important data to provide the optimal conditions for each particular genetics. This is an exciting phase and we look forward to reporting back to you on our learnings and improvements as well as the positive impacts on our annual harvest run rate.”
Cooper estimates an increase in revenue from the reported $42.6 million in 2020 to $62 million in 2021 for a 45.5 per cent year-over-year jump, followed by another forecasted spike to $101.4 million in 2022, marking a potential 63.5 per cent year-over-year increase.
He also projects annual adjusted EBITDA to become positive by 2022 ($26.5 million) after losses of $10 million in 2020, and a projected loss of $3.4 million in 2021.
Cooper’s valuation data also works in Lowell’s favour, as he projects the EV/Sales multiple to drop from 6.3x in 2020 to a reported 4.3x in 2021, then down again to a projected 2.7x in 2022. Meanwhile, Cooper has projections on the EV/EBITDA multiple (10.2x) and the price-earnings ratio (35.8x) coming into focus in 2022 and beyond.
Overall, Cooper believes Lowell Farms is well on its way to becoming a national brand with the potential to surpass $500 million in earning power, particularly if the American cannabis market moves more toward specialization with specific growers and processors.
“While it may not be necessary to fully vertically integrate to the farm itself, having access to cheap feedstock is critical to controlling end-market pricing, which management believes will drive consumer demand to pre-rolls versus flower, as it did in the cigarette market,” he said. “Pre-rolls are the CPG form factor which enables more effective branding. Lowell has all of these pieces now in place to make Lowell Smokes the largest and most valuable brand on the market.”
Lowell Farms closed last week trading at C$1.52/share on the Canadian Securities Exchange, down two cents from its Thursday closing of $1.54/share. The stock has had fairly even performance throughout 2021, up four cents (2.7 per cent) since January 1 with a high point of $2.45/share coming on February 26.
At press time, Cooper’s C$5.00 target represented a projected 12-month return of 218 per cent.