VRNO stock is a buy, Beacon says

Despite a hiccup in Florida, Beacon Securities analyst Russell Stanley remains bullish on Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials NEO:VRNO)

Stanley explains that VRNO’s efforts in Florida appear to have slipped a little, a development he thinks is short term and not really material.

“VRNO’s flower sales volumes in Florida slipped 6% in Q2, trimming the company’s market share by 102 bps to 8%, though it still ranked 3rd statewide,” the analyst noted. “That was partially offset by a 4% increase in oil-based product sales, with VRNO’s 9% market share ranking it 5th statewide for that product category as well. We have therefore trimmed our Q2 revenue forecast from $227M to $221M, bringing it in line with Q1 levels as well as the low end of management’s top line guidance provided on the May 8th earnings call.

Stanley says the Florida volumes reflect short-term gain for mid and long-term gain.

“The q/q flower sales decline can be attributed primarily to upgrades at the company’s 220k SFT cultivation/manufacturing facility in Apollo Beach aimed at increasing the facility’s capacity by ~40%,” he explained. “The company has implemented double stacked cultivation in 18 of 33 flower rooms, which naturally required taking rooms offline (typically three at a time) through that process. We continue to believe that VRNO’s leverage to Florida has been overlooked by the market. Florida continues to be VRNO’s top market by revenue (and we believe its highest margin state), contributing 23% of sales in Q1, ahead of both New Jersey (18% of sales) and Illinois (17%). That makes VRNO one of the most Florida-levered publicly traded cannabis companies. Recent polling, including one from Fox News, indicates that the measure has the requisite 60%+ voter support, and the program calls for the AU market to open in May 2025, so it would make a meaningful contribution to F2025 results.”

In a research update to clients July 10, Stanley maintained his “Buy” rating and $12.75 target on Verano Holdings, implying a return of 157% at the time of publication.

The analyst thinks VRNO will post Adjusted EBITDA of $277.0-million on revenue of $920-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $317.0-million on a topline of $983.0-million the following year.

“VRNO is now trading at 5.6x our F2025 adj EBITDA forecast,” Stanley concluded. “This represents a 25% discount to the 7.4x average amongst the other four major MSOs. We continue to include VRNO’s tax payables as debt in our EV calculation, while excluding potential adult-use legalization in Florida. While our F2025 baseline adj EBITDA forecast is $317M v. consensus at $321M, we estimate that annualized EBITDA would improve to $390-$463M assuming a 2-3x market expansion in FL (typical of AU flips). The stock is now trading at 3.9x-4.6x those adj EBITDA scenarios.”