Beat the market with this cannabis stock, says Beacon

US cannabis company Schwazze (Schwazze Stock Quote, Charts, News, Analysts, Financials NEO:SHWZ) is bulking up in the state of New Mexico with announced plans for a $38-million acquisition, and analyst Russell Stanley of Beacon Securities says the move will add vertical integration to its operations and take its footprint in the state to 32 stores.

Denver-based Schwazze (formerly Medicine Man Technologies), which is the #2 operator in Colorado by retail footprint, announced on Tuesday that it has signed documents to acquire Sucellus, which operates in New Mexico as Everest Cannabis. The deal would add 16,000 sq ft of indoor cultivation capacity and 34,000 sq ft of outdoor capacity along with 8,500 sq ft of manufacturing footprint and 14 combined adult-use/medical dispensaries. 

The deal, which would put Schwazze at 32 stores and only behind #1 Ultra Health at 38 stores, involves $12.5 million in cash, a four-year $17.5 unsecured note paying five per cent, $8 million in stock and up to $8 million in earnouts to be paid in stock.

“This planned acquisition shows our commitment to the Company’s super-regional cannabis growth strategy to go deep in select markets,” said Nirup Krishnamurthy, President of Schwazze, in a press release. “The Everest brand is a perfect complement to our existing retail brand in New Mexico, R. Greenleaf.

Commenting on the deal, Stanley said Schwazze finished 2022 with $39 million in cash and equivalents and thus has ample flexibility to fund the cash component of the Everest deal. The analyst increased his 2023 adjusted EBITDA forecast from $56 million to $62 million and his 2024 forecast from $69 million to $84 million. On revenue, he is forecasting $203 million for 2023 and $284 million for 2024.

“SHWZ has quickly established itself as one of New Mexico’s largest operators,” Stanley wrote in a Thursday report. “Schwazze entered New Mexico in February 2022 with the $42 million acquisition of Greenleaf, obtaining a vertically integrated platform featuring ten dispensaries. That transaction was well timed, given the adult-use market opened in April 2022.”

“Since then, SHWZ has expanded organically via the opening of eight greenfield stores, so the Everest transaction is the company’s first in NM since its entry. We understand that SHWZ intends to develop a retail base of 40-50 stores in New Mexico, so additional organic/acquisition growth is expected,” he said.

Stanley noted that New Mexico’s legal sales were $48 million in the month of March, which was up 15 per cent from February. First quarter sales were at $130 million, up seven per cent from the previous quarter.

The analyst said at 4.2x his 2024 EV/EBITDA forecast SHWZ is currently trading at an 16 per cent discount to its peer group at 5.0x. Up ahead, Stanley sees potential catalysts for Schwazze in the Q1 results in May, the closing of the Everest deal and further buildout and M&A.

With the update, Stanley reiterated a “Buy” rating and C$3.00 target, representing at press time a projected return of 82 per cent.