Curaleaf looks good in US cannabis, says Beacon

Beacon Securities analyst Russell Stanley is staying bullish on Curaleaf Holdings Inc. (Curaleaf Stock Quote, Chart, News, Analysts, Financials CSE:CURA), maintaining his “Buy” rating and C$18/share for a potential return of 147 per cent in an update to clients on Tuesday.

Headquartered in Wakefield, Mass., Curaleaf Holdings is one of the largest cannabis companies in the US, with a vertically integrated business that includes at last count 109 dispensaries, 22 cultivation sites and 30 processing facilities across 23 states and covering an aggregate population of 192 million.

Stanley’s newest analysis comes after the company released its first quarter financial results for the 2022 fiscal year, while also naming its new CEO.

“Management noted that the macro environment continues to be challenging, with normal Q1 seasonal slowness combined with reduced discretionary income/spending (the end of stimulus payments) providing notable headwinds,” Stanley said.

Curaleaf’s financial report was headlined by $313 million in revenue for a 20 per cent year-over-year decrease, though it also represented a two per cent sequential decrease, with management attributing the drop to reduced reorders in January and February, paired with the company’s price discipline in Colorado and California. (All figures in US dollars except where noted otherwise.)

However, Curaleaf did get positive contributions from its European operations, with the reported $8 million in revenue representing a 70 per cent year-over-year increase.

“With the German Health Minister recently indicating plans to prioritize development of an adult-use legalization bill, and the Justice Minister suggesting the market could open in 2023, CURA’s European operations give it a unique and timely platform for growth in this market,” Stanley said.

Closer to home, the company also reported that its dispensary in Bellmawr, N.J., which is just across the Delaware River from Philadelphia, is now approaching a $100 million revenue run rate, after opening for adult-use service less than three weeks ago, with two more dispensaries in the pipeline.

“Our national footprint has always been a key advantage of our growth strategy, and despite a tough macro environment during the first quarter, Curaleaf continued to grow share in several important markets,” said Boris Jordan, Chairman of Curaleaf in the company’s May 9 press release. “Given renewed optimism surrounding federal banking reform, a record breaking 4/20, the exciting launch last month of New Jersey adult-use sales, and the prospect of New York following suit, 2022 is shaping up to be another milestone year.”

Curaleaf followed up its quarterly results by officially introducing Matt Darin, who previously joined the company in 2020 through the acquisition of Grassroots, as its new Chief Executive Officer after naming him to the position in January. Meanwhile, outgoing CEO Joe Bayern will remain with Curaleaf as he is slated to launch a new CPG-based division of Curaleaf.

“I firmly believe we are building the best team in cannabis and I’m energized and humbled to lead Curaleaf at this pivotal moment,” Darin said on May 10. “We’ve built the foundation to continue to be the industry leader for the long term with a focus on operational excellence in every aspect of our business. We are leveraging the power of our 131 highly productive dispensaries and the accelerating distribution of our brands in 2,200 wholesale accounts throughout the U.S. I’m grateful to the board for their confidence in me as we move to the next phase of our journey.”

Stanley’s major financial estimates remain unchanged, as he continues to forecast 2022 revenue of $1.46 billion for a potential year-over-year increase of 20.3 per cent, with a jump to a projected $2.13 billion in 2023 for a potential year-over-year increase of 46.1 per cent.

From a valuation perspective, Stanley believes the company’s EV/Revenue multiple will drop from the reported 4.1x in 2021 to a projected 3.6x in 2022, then drop to a projected 2.3x in 2023.

Meanwhile, Stanley continues to forecast adjusted EBITDA of $376 million in 2022 for a projected margin of 26 per cent, which he expects to widen to 34 per cent in 2023 with an adjusted EBITDA figure of $715 million.

In terms of valuation, Stanley projects the company’s EV/adjusted EBITDA to drop from the reported 16.6x in 2021 to a projected 13.2x in 2022, then dropping to a projected 6.9x in 2023.

Though Curaleaf presently trades at a five per cent discount on the 2023 adjusted EBITDA forecast compared to its peer group, Stanley is still a strong believer in what Curaleaf can bring to the table.

“We continue to believe that CURA deserves a premium multiple, as its size/scale will be particularly attractive to new cannabis investors once market sentiment improves and/or reform measures allow for US exchange listings,” Stanley said.

The past year hasn’t been good for cannabis stocks and Curaleaf’s share price has experienced a 33.8 per cent loss since the start of 2022, dropping off dramatically after reaching a 2022 high of $11.25/share on February 20 and dropping as low as $7.12/share on March 7.