Things are lining up for a fruitful year in the cannabis space, says Echelon Capital Markets analyst Andrew Semple, who thinks investors would do well to look at two companies in particular.
In a research report to clients January 11, the analyst took a long view of the sector and said there is more good than bad.
“After a turnaround year, we are optimistic that 2024 could be much more constructive for the North American cannabis industry,” Semple said. “The leading US cannabis multistate operators (“MSOs”) have made the necessary changes to their business strategies to demonstrate positive FCF generation (collective ~$660M y/y unlevered FCF improvement for our US coverage) and reduce their reliance on the volatile cannabis capital markets. Canadian Licensed Producers (“LPs”) have made progress toward stemming operating losses while some former craft-scale producers are emerging as serious contenders for market leadership. In addition, Canadian cannabis retailers successfully deployed the aggressive discount retail model with resounding success, and now look to reap improved profits while pursuing sustained expansion to market share.”
Semple says he likes two cannabis stocks for 2024, Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials NEO:VRNO), which he has a “Buy” rating and $11.00 price target on, and High Tide (High Tide Stock Quote, Chart, News, Analysts, Financials TSXV:HITI), which he rates a “Speculative Buy” with an $9.00 target
“We estimate that Verano offers an attractive unlevered FCF yield of 7.5% in 2024, growing to 9.1% by 2025,” the analyst wrote. “We estimate that this would jump rapidly to 12.5% in 2024 and 14.1% in 2025 if the 280E tax was removed with a Schedule III DEA ruling. We like Verano for its torque to regulatory catalysts, while its high-quality assets and balance sheet offer downside protection. High Tide will continue to amass market share in the Canadian retail vertical, driven by its successful discount club model, new store openings, and likely further acquisitions. Recent legislation to double the maximum allowed store count in Ontario will help High Tide accelerate organic and acquisitive growth in its largest provincial market.”
Semple ran down the potential green shoots and the risks that could play out in 2024.
“We believe the operating and regulatory milestones required to deliver on forecasted growth in 2024 are clearer than in prior years, and expectations are also more muted. This is a good setup for better share price performance in 2024. Consensus forecasts for companies now appear less dependent on the timing of M&A, state-level or federal regulatory catalysts, or new market legalization scenarios. In our view, the biggest uncertainties to the 2024 outlook (focusing on the US) are the pace of cannabis pricing changes and the timing for the start of adult-use sales in Ohio. We believe 2024 is likely to see legal cannabis pricing continue to decline, though the pace of price declines should slow with volume sales growth likely to offset this pressure. If pricing conditions hold relatively steady, many MSOs would be in a good position to exceed financial forecasts. A risk to this outlook is if struggling businesses attempt to liquidate inventory at any price point, which could result in pressure on pricing and impact the consensus outlook.”
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