Schwazze has a Buy rating in US cannabis, Beacon says

US cannabis name Schwazze (Schwazze Stock Quote, Charts, News, Analysts, Financials NEO:SHWZ) has been pretty up and down over the past 12 months, but investors can expect upside from current levels, according to Beacon Securities analyst Russell Stanley, who delivered a pre-quarter update on Monday. Stanley said Schwazze has been building up its presence in the states of Colorado and New Mexico through organic and inorganic means.

Vertically-integrated cannabis company Schwazze has the second largest retail footprint in Colorado and the third largest retail base in New Mexico. Last month, the company announced a definitive agreement to buy two dispensaries currently operating under the Smokey’s brand in Garden City and Fort Collins, which upon closing will put Schwazze’s total in the state at 27 stores. In New Mexico, Schwazze announced last week another R. Greenleaf store opening, this one in Carlsbad, to bring its total in the state to 18 stores.

“We are truly excited to be a part of the local Carlsbad community as we expand throughout the state of New Mexico. I’d like to thank our R.Greenleaf support center and retail teams who have been hard at work helping us realize our state-wide expansion efforts for this customer-focused retail banner,,” said Ken Diehl, Schwazze New Mexico Division President, in a press release.

Ahead of fourth quarter earnings due on Wednesday after market close, Stanley said he’s expecting revenue to come in at $41 million and adjusted EBITDA at $14 million, while the consensus call is also for $41 million in revenue and adjusted EBITDA at $13 million. (All figures in US dollars except where noted otherwise.)

On the company’s Colorado prospects, Stanley noted that the state produced overall legal sales in the fourth quarter of $411 million, down nine per cent from the third quarter.

At the same time, the analyst said Schwazze has been typically outperforming the market in Colorado on revenue growth.

“We continue to expect SHWZ to work towards a retail platform of 100+ dispensaries in CO, which currently hosts ~650+ stores, and M&A is likely to play a major role. During Wednesday’s conference call, we will be looking for an update on the M&A environment in Colorado,” Stanley wrote.

Stanley noted that in mid-February, Schwazze Chair and CEO Justin Dye purchased 500,000 shares and now owns almost 44 million, representing 31 per cent of basic shares outstanding. Stanley said Dye’s ownership is among the most aggressive insider buying he’s seen in the cannabis space and that it bodes well for the company and stock.

“SHWZ now trades at 5.3x our F2023 adjusted EBITDA forecast. This represents an 18 per cent discount to the 6.4x average amongst CSE-listed US operators. Potential company-specific catalysts include the Q4 results on Wednesday, potential M&A activity, and further buildout updates,” he wrote.

With the update, Stanley reiterated a “Buy” rating and C$3.00 target on Schwazze, representing at press time a projected one-year return of 76 per cent.