Beacon Securities analyst Russell Stanley launched coverage on Tuesday on US cannabis company Schwazze (Schwazze Stock Quote, Charts, News, Analysts, Financials NEO:SHWZ), saying that with a proven management team and a stock that’s trading at a discount to its peers, Schwazze is deserving of a “Buy” rating. With operations in Colorado and New Mexico, Schwazze (formerly Medicine Man Technologies) has been an active M&A player recently, having closed on acquisitions since December 2021 that have added 15 cannabis dispensaries to its stable, along with four cultivation facilities in New Mexico and one in Colorado as well as a manufacturing asset in New Mexico. Schwazze is currently the second-largest player by retail footprint in the well-developed cannabis economy of Colorado, and the company had its first recreational cannabis sales in New Mexico in April of this year. On its financials, Schwazze reported $44.3 million in revenue for its latest quarter, the company’s Q2, delivered last month, up from $30.7 million a year earlier. Adjusted EBITDA for the quarter was $15 million compared to $10 million a year earlier. (All figures in US dollars except where noted otherwise.) "Similar to the rest of the country, the cannabis industry in Colorado is also experiencing a slowdown in growth compared to the last couple of years,” said Chairman and CEO Justin Dye in the second quarter press release on August 11. “Schwazze, however, is demonstrating that our regional strategy, built on a customer first approach, developing significant scale, building brands and leveraging data analytics and technology is not only sound but gaining momentum as demonstrated by revenue and unit sales growth, customer loyalty and by once again outpacing the legacy market growth by approximately 12 per cent,” he said. Schwazze began trading on the Toronto-based NEO Exchange in March of this year and has lost about 17 per cent of its value in the time since. But Stanley likes the look of Schwazze, especially management, which he called shareholder aligned and bringing with it strong depth in the retail sector. Stanley cited that Schwazze officers and directors own over 77 million common share equivalents, representing 55 per cent of the basic shares outstanding, with CEO Dye owning 41 million common share equivalents and two million options. Moreover, pointing to the pedigrees of both Dye and Chief Strategy Officer Todd Williams, Stanley said Schwazze management is punching well above its weight given its market cap of C$281 million. “Mr. Dye previously served in several C-Suite roles with Albertsons Companies, where he was instrumental in making it one of the largest food and drug retailers in the United States. During Mr. Dye’s tenure, Albertsons expanded annual sales from $10 billion to $60 billion, expanding to 2,300+ stores with 285,000 employees,” Stanley wrote. Looking at Schwazze’s focus in Colorado, Stanley said the market remains competitive but it’s ripe for consolidation. With a population of 5.7 million, Colorado has the second largest legal cannabis market in the world at 2021 sales of $2.2 billion. The analyst noted that sales are down 21 per cent year-to-date, however, as access to capital in the tighter market remains difficult. But that should only make it more likely that additional vendors will come forward as ripe for the picking, Stanley said. “Given management wants to develop a 100+ store footprint in CO versus its current network of 23, M&A will likely play a significant role in the required quadrupling of the store count,” he said. Also, Stanley likes Schwazze’s performance so far in terms of profit, where the company’s recent Q2 margins were at 34 per cent, putting it in good company with many of the US’s largest multi-state operators. “We believe this demonstrates the company’s operational skill, particularly given these margins were produced during a tough operating climate in CO, and we note that management’s guidance implies further improvement in H2,” Stanley wrote. Looking ahead, Stanley is expecting Schwazze’s revenue to go from $108 million in 2021 to $165 in 2022 to $189 million in 2023. On adjusted EBITDA he is calling for a move from $32 million in 2021 to $52 million in 2022 to $61 million in 2023. On valuation, Stanley sees Schwazze’s EV/Revenue going from 3.3x in 2021 to 2.1x in 2022 to 1.9x in 2023 and for its EV/adjusted EBITDA multiple going from 11.0x in 2021 to 6.8x in 2022 to 5.8x in 2023. Stanley has started Schwazze off with a 12-month price target of C$3.00 per share, which at the time of publication represented a projected return of 71 per cent. Stanley has SHWZ currently trading at 5.8x his 2023 EBITDA forecast which represents a 21 per cent discount to the 7.3x average among CSE-listed US cannabis operators. Stanley says US cannabis stocks have looked materially stronger of late, likely owing to optimism surrounding the SAFE Banking Act in the US which is currently trying to make it through Congress. Stanley also added that the ETFMG Alternative Harvest ETF (Etfmg Alternative Harvest Stock Quote, Charts, News, Analysts, Financials NYSEArca:MJ) recently announced plans to begin adding US cannabis operators to its portfolio, referring to improving odds for federal reform on cannabis in the United States, where marijuana remains a Schedule One narcotic. “While we have seen several false starts relating to federal reform over the last two years, and betting on legislative action involves risk, we believe the odds of SAFE have improved materially in recent months, supporting multiple expansion across the space,” Stanley wrote.