You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
We think that cannabis stocks have very attractive valuations for the most part, but we aren’t sure that this matters right now. The cannabis industry has been struggling with slowing overall growth and with tough capital markets. Again, we think that the ultimate reversal of what is now a 2 1/2 year bear market will require either the elimination of 280E taxation or the ability of American cannabis stocks to trade on the NASDAQ or another higher exchange, but we are not in a position to predict the timing of either of these.
When the industry got started, investors could look only at revenue projections, as there were no profits yet. As the legal cannabis industry grew, investors began to focus on profitability as measured by adjusted EBITDA, which is the earnings before interest expense, taxation and depreciation and amortization with certain types of expenses removed, like stock compensation. American cannabis companies are priced very inexpensively to forward estimates. Looking at the projected 2023 estimates for adjusted EBITDA, the largest 5 American cannabis companies are trading in a range of 4.0X to 8.5X, an average of 5.7X.
Many investors have questioned using the metric, but due to the high tax-rates, very few companies are earning a net income, which makes a PE ratio difficult to use. Looking at the largest American cannabis operators, they all have debt, but some have more debt than others. Many investors are rightly concerned about the future. How will these companies pay off or extend their debt?
I use a metric that is very different, price to tangible book value (TBV), which helps measure staying power in my view. Most of the large American cannabis companies have negative tangible book value, which means that their assets less liabilities is exceeded by their goodwill and intangibles. For debt-free companies generating cash, price to TBV is not so important, but to companies facing tough capital-raising, it could be very important. Here is a table with the price to TBV and the enterprise value to adjusted EBITDA projected in 2024 for the largest American cannabis companies:
Of the 5 top American cannabis companies, the only one with substantive tangible equity is Green Thumb Industries, at $551 million. Still, with a market cap of $1.66 billion, the stock is no value at 3X TBV. Trulieve has TBV of just $17 million, while the other largest MSOs are negative, including Verano at -$90 million, Cresco Labs at -$166 million and Curaleaf at a stunning -$722 million.
In Canada, a federally legal market, some of the LPs trade below tangible book value with no debt and lots of cash. Canopy Growth trades more expensively than these at a 30% discount, but the company has a lot of net debt and is generating large use of cash from its operations. Tilray, which we have warned about, had at the end of Q3 a tangible book value of $333 million, but it has more debt than cash and trades at 5.7X TBV. We continue to be concerned with the valuation.
At 420 Investor, I have very high exposure to cannabis companies with low price to TBV in my model portfolios, mainly in Canada but across ancillary and American cannabis companies too. My largest MSO position is an American operator that is debt-free and trading at just 1X tangible book value.
With the bear market winds still blowing forcefully, we suggest that investors pay attention to the tangible book values of cannabis companies.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Financial Reports
Ayr Wellness Q2 Revenue Declines 1% Sequentially
Columbia Care Q2 Revenue Increases 4% Sequentially to $129.2 Million
Cresco Q2 Revenue Increases 2% From Q1 to $197.9 Million
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Sincerely,
Alan & Joel
