Village Farms is tops in cannabis, says Beacon

Investors interested in the beat-up cannabis space should be thinking about buying a top dog in the race, and that would be Village Farms (Village Farms Stock Quote, Charts, News, Analysts, Financials NASDAQ:VFF), according to Beacon Securities analyst Doug Cooper, who provided an update to clients on Tuesday where he reiterated a “Buy” rating on the stock.

One of the largest vertically-integrated greenhouse growers in North America, Village Farms has a produce segment, a cannabis segment in Canada and hemp business in the US. The company reported its first quarter 2023 financials on May 10, with consolidated sales down eight per cent year-over-year to $64.7 million and consolidated adjusted EBITDA of $0.5 million compared to negative $6.1 million a year ago. For the quarter, cannabis net sales increased four per cent to $30.1 million. (All figures in US dollars.)

“The first quarter was a solid start to 2023 as continued strong growth in our Canadian Cannabis business and steady sequential performance in our US Cannabis business were complemented by another quarter of significantly improved results in our Fresh Produce business,” said Michael DeGiglio, CEO, in a press release.

Cooper called the quarterly results better than expected and driven by a much-reduced cash burn in VFF’s produce segment and continued industry-leading profitability in its Canadian cannabis segment.

Cooper’s thesis on Village Farms is that the Canadian cannabis scene is about to undergo some serious consolidation, including among the top 11 producers which together have about 60 per cent of the market share. The analyst argued that like many other industries (airlines, cellphone providers, banks, etc.) in Canada, time has whittled each field down to a small handful, and for cannabis, that will likely mean we’ll be left with the few companies that have both strong balance sheets and strong profit margins. 

Further, Cooper pointed out that where the so-called first movers in Canadian cannabis — Canopy Growth, Aurora Cannabis, Cronos Group, e.g. — have all failed to live up to their potential, the underappreciated Village Farms has emerged as a powerhouse in low-cost production and a steady gainer in market share.

Of the 11 companies at the top, Cooper said Village Farms is in the best position.

“VFF is the most profitable cannabis company in the country with an EBITDA margin of ~15 per cent. The forced exit of a number of companies should leave VFF an opportunity to significantly grow its share. In essence, we believe the writing is on the wall that VFF will be the big winner in the Canadian market,” he said.

With the reiterated “Buy” rating, Cooper moved his 12-month target on VFF from $4.50 to $2.50, representing at press time a projected return of 252 per cent.