The sector may be in a rut but opportunity abounds in US cannabis, according to Beacon Securities analysts, who see four companies in the still-hot Florida market that deserve your dollars. Beacon analysts Doug Cooper and Russell Stanley recently delivered an update on the Sunshine state, singling out four “Buy” ratings in their coverage along with one “Tender”.
Long been a money-making machine for companies smart enough to put up shops in its still-growing medical use cannabis market, Florida now has over 723,000 qualified active patients and counting, with data from the Department of Health’s Office of Medical Marijuana Use (OMMU) showing a fairly steady weekly average increase in net new patients of between 2,500 and 4,250 over recent months.
The terrain is dominated by Florida-based Trulieve Cannabis, which currently has about 49 per cent of the state’s market share by flower volumes. But that number has been slipping a bit over the past couple of years as more players clamber for a piece of the action. In fact, the OMMU has a total of 12 different companies with market share between one and 15 per cent. (See the listings below for flower volume market share per company on Beacon’s list.)
Verano Holdings (Verano Stock Quote, Charts, News, Analysts, Financials CSE:VRNO)
Price target: C$38.00
Projected one-year return: 291 per cent (note: all returns are as of market close on Friday, May 20)
Florida flower market share: 8 per cent
Chicago-headquartered Verano has interests across 15 states with core markets in Illinois, Florida, New Jersey, Pennsylvania, Arizona, Maryland, Ohio and Nevada. The company is set to report earnings on Wednesday morning, with management having said last month on the fourth quarter earnings call that there’d be a mid-single digit drop in sequential revenue in the Q1, although management also said sales activity had picked up in March and into April.
Previewing the quarter was Stanley who said in a Friday note to clients that he’d be looking for operating cash flow for the Q1 of $42 million before working capital, saying that Verano is traditionally one of the strongest cash flow producers in the cannabis space. Stanley is also interested in management’s comments on the current second quarter, along with how the company is faring in the newly-opened New Jersey adult-use market. Stanley noted that VRNO recently opened two more dispensaries in Florida to bring its count to 47 in the state for the third-largest footprint overall. (All figures are in US dollars except where noted otherwise.)
“As we view Florida as one of the company’s most important markets, we will be looking for VRNO’s latest plans in that state,” Stanley wrote in the May 24 report. “VRNO continues to trade at a significant discount to multiple major [multi-state operators] despite its superior margin performance and strong relative liquidity (3rd highest in the group based on the 30-day average value- traded). Potential company-specific catalysts include the Q1 results/commentary on Wednesday, further buildout updates and M&A activity.”
Price target: C$68.00
Projected return: 795 per cent
Florida flower market share: 4 per cent
Also set to deliver first quarter results this week is US MSO Ayr Wellness, which is due to report on Thursday. Ayr is currently tied with Verano for third place in terms of store count in Florida at 47 locations, while the company recently opened a 4,000 sq ft dispensary in Orlando and has opened 16 locations since acquiring Liberty Health Sciences in February 2021.
Stanley said he’s looking for Ayr to deliver revenue and adjusted EBITDA of $110 million and $24 million, respectively, for the Q1 and will be looking for updates on guidance from management who in March called for $800 million in annualized revenue and $250 million in EBITDA.
The analyst sees Ayr to be currently trading at a 74 per cent discount to its peer group, saying that the company’s balanced attack is getting no credit.
“We continue to view AYR as having the most geographically balanced revenue base in the space. The stock now trades at 2.0x our F2023 adjusted EBITDA forecast,” Stanley wrote in a Friday update. “Potential company-specific catalysts include the Q1 results/commentary [on] Thursday, closing the pending acquisitions in Illinois and Nevada, and further buildout updates/M&A activity.”
Price target: C$18.00
Projected return: 124 per cent
Florida flower market share: 14 per cent
One of the largest cannabis companies in the United States, Massachusetts-based Curaleaf has 131 dispensaries at last count across 22 states and owns 26 cultivation sites. The company reported first quarter 2022 results earlier this month, showing revenue and EBITDA at $313 million and $73 million, respectively, with the numbers coming in slightly under the consensus forecasts of $317 million and $76 million, respectively.
But management reiterated its 2022 guidance for revenue hitting between $1.4 and $1.5 billion with an adjusted EBITDA margin of about 28 per cent, saying that sales were tough in the early part of the year but were picking up in March and April. Stanley noted in the Tuesday Florida report that Curaleaf now has approval to open a location in each of Tampa and Orlando, effectively taking its statewide store count to 50.
In a May 10 update to clients, Stanley said at 6.9x his 2023 EBITDA forecast Curaleaf was trading at about a five per cent premium to the 6.6x average of CSE-listed US operators, which he called a deserved premium.
“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. Potential company-specific catalysts include buildout updates (particularly dispensary openings in New Jersey), M&A activity, the Q2 results in August, and the closing of the Tryke acquisition (likely H2/22),” Stanley wrote.
Price target: C$8.50
Projected return: 124 per cent
Florida flower market share: 2 per cent
New York City-headquartered Columbia Care announced in March a deal to be acquired by US cannabis big-wig Cresco Labs. With a price tag of $2 billion, the deal has now cleared the 30-day waiting period for antitrust regulators, and Columbia Care has said it is now working through the proxy circular clearance process with the US SEC, after which it will seek shareholder approval. Shareholders representing 25 per cent of the voting power have entered agreements to support the transaction.
Columbia Care’s first quarter results fell short of consensus forecasts as well as those estimated by Stanley, with the analyst nonetheless noting the company’s strong gross margin improvement over the quarter.
In the new Tuesday note, Stanley said, “During its Q1 earnings call, management noted that it saw increased basket sizes on a quarter-on-quarter basis in Florida and that it is working to double its canopy. We note that the proposed acquisition by Cresco will require the sale of either company’s license.”
Price target: C$15.00
Projected return: 184 per cent
Florida flower market share: 3 per cent
Last up is Cresco Labs itself, which is based in Chicago and has operations across ten states including 21 production facilities and 49 dispensaries. Cresco delivered its first quarter earnings last week, showing revenue and adjusted EBITDA of $214 million and $51 million, respectively. The revenue was ahead of Stanley’s and the consensus calls at $214 million and $211 million, respectively, while the Q1 adjusted EBITDA was short of Stanley’s and the Street’s, both at $53 million.
Stanley noted that last week on the conference call Cresco management was optimistic on regulatory reform at the federal level in the US and that the Columbia Care acquisition was progressing on track.
“During its quarterly earnings call, Cresco reported that it finished its manufacturing kitchen and introduced edible products in its retail locations during Q1, noting this as a ‘huge unlock’ towards providing the full suite of Cresco products in FL, driving revenue/margin improvement. Along with Pennsylvania, Cresco highlight Florida as a target for store openings in F2022,” Stanley wrote in his Tuesday report.