Cannabist stock is a buy, Beacon says

Beacon analyst Russell Stanley says the most recent results were better than expected for The Cannabist Company (The Cannabist Company Stock Quote, Chart, News, Analysts, Financials NEO:CBST).

On May 9, CBST reported its Q1, 2024 results. The company posted Adjusted EBITDA of $15.3-million on revenue of $122.6-million.

“Our first quarter results demonstrate an improvement over the prior quarter on a margin basis, and we are encouraged by the green shoots that are evident in several critical areas of the business. As we have emphasized, this year we are committed to building a better business, with a focus on improving our margins as we target free cash flow generation,” CEO David Hart said. “We have demonstrated early successes in better utilizing our footprint and existing cultivation and manufacturing facilities, evidenced by a decrease in the overhang on gross margin in the quarter. We are transforming the wholesale business, including shifting the wholesale mix toward finished goods and building strategic brand partnerships that are helping to recapture margin across the portfolio. As we look ahead, we are preparing for the upcoming adult-use transition in Ohio and are continuing to capitalize on growth opportunities in markets like Virginia and New Jersey. Though we are encouraged by the results of the first quarter, we know there is more work to do. We look forward to enacting additional changes to the business so that we end 2024 having a materially improved financial position and are poised to compete more effectively.”

Stanley summed up the quarter, which he noted showed margin improvement that he finds encouraging.

“CBST recently reported Q1 revenue/adjusted EBITDA of $123M/$15M. Relative to our forecast of $130M/$15M and consensus at $127M/$15M, the top line was light but was offset by stronger than expected margins,” he wrote. “Given management’s stated focus on driving margin improvement, the Q1 results should be viewed favourably. Adjusted gross margins were ~170 bps stronger than we forecast, and improved ~500 bps q/q, with Q4 margins negatively impacted by deliberate inventory reductions. CBST’s focus on sweating its existing assets is yielding fruit. Management reported that wholesale gross margins improved over 1,000 bps q/q as the company continues to get better utilization out of its cultivation/manufacturing facilities, while upgrading the wholesale revenue mix by transitioning from sales of bulk biomass to finished goods (supported in part through additional brand partnership launches). Management added that the ~500 bps margin drag associated with underutilization of the cultivation/manufacturing assets improved/declined to ~420 bps in Q1 through improvement across markets, most notably in Ohio, Colorado, and New Jersey. Retail gross margins also improved 200 bps due better price discipline/reduced discounting across markets.”

In a research update to clients May 13, Stanley maintained his “Buy” rating and price target of $1.50 on CBST, implying a return of 285% at the time of publication.

The analyst thinks CBST will post Adjusted EBITDA of $71.0-million on revenue of $514.0-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $103.0-million on a topline of $578.0-million in fiscal 2025.

“CBST is now trading at 4.3x our F2025 adjusted EBITDA forecast. This represents a 47% discount to the 8.1x average amongst US operators,” Stanley concluded.