Beacon Securities analyst Russell Stanley said his thesis remains intact on US cannabis name Schwazze (Schwazze Stock Quote, Charts, News, Analysts, Financials NEO:SHWZ) after the Colorado-based company reported third quarter earnings. In a Thursday report to clients, Stanley reiterated a “Buy” rating on Schwazze and C$3.00 target price, good for a projected one-year return of 88 per cent.
Schwazze, formerly Medicine Man Technologies, has the #2 retail footprint in Colorado and is #5 in New Mexico. The company reported revenue up 36 per cent year-over-year to $43.2 million for its Q3, posted on Wednesday, with adjusted EBITDA up 36.7 per cent to $15.9 million. (All figures in US dollars except where noted otherwise.)
Operationally, Schwazze has closed on the acquisition of 15 cannabis dispensaries so far this year, ten in New Mexico and five in Colorado, along with four cultivation facilities in New Mexico and one in Colorado and one manufacturing asset in New Mexico.
Commenting on the quarter and year, Chairman and CEO Justin Dye said the economic backdrop has been challenging but that the company has outperformed its markets in Colorado by 12 per cent.
“We’ve worked hard to continue to grow our market share, increase our profitability rate and generate free cash flow from operations, after paying taxes and capex, placing us in an exclusive club within the cannabis sector. This is a proof point that we are well on our way to building Schwazze into a unique regional powerhouse,” Dye said in a press release.
Stanley said Schwazze’s Q3 revenue arrived under expectations, with the $43.2 million topline comparing to his estimate at $45.0 million and the consensus at $44 million, while the $16 million in adjusted EBITDA was better than Stanley’s call at $15 million and the Street’s $14 million.
Stanley said oversupply brought down wholesale pricing in Schwazze’s Colorado market but that the drop was more than compensated by strong margins, with Q3 gross margins of 60 per cent coming in 383 basis points better than forecast, resulting in the earnings beat.
“SHWZ ranked fourth out 28 companies with a 34 per cent adjusted EBITDA margin in Q2, and with margins improving to 37 per cent this quarter, we expect it to rank very highly once the season is complete. The company also produced $4.0 million in cash from operations, representing a CFO margin of nine per cent,” Stanley wrote.
Stanley noted management trimmed its guidance, calling now for full 2022 revenue of between $155 and $165 million and adjusted EBITDA between $51 and $56 million.
Stanley said the market continues to overlook Schwazze, partly because the markets in which it operates are largely ignored or avoided by many of the publicly-traded pot co’s. The analyst sees Schwazze to be currently trading at a 23 per cent discount to its CSE-listed US cannabis peers.
“We continue to believe that SHWZ’s demonstrated ability to produce industry leading margins justifies a higher multiple. Potential company-specific catalysts include further M&A activity, additional buildout updates (four more stores planned for New Mexico before year end), the closing of the Lightshade acquisition in Q1/23, and the Q4 results in early 2023,” Stanley wrote.