Cannabis Stocks Post Strong Q2 Growth
September 3rd, 2020
News, Top Story
The COVID-19 pandemic has disrupted large swaths of the economy, but some sectors have outperformed others. In particular, the cannabis industry has behaved more like a consumer staple than a discretionary good with robust demand throughout the pandemic. The result has been a rebound across many cannabis stocks that had seen earlier depressed valuations.
Let’s take a look at the underlying consumer demand picture, how cannabis companies have performed and where investors can look for opportunities ahead, including emerging multi-state operators like Red White & Bloom Brands Inc. (CSE: RWB) (OTC: RWBYF).
Strong Sales Growth
Several cannabis markets experienced robust sales growth during the second quarter. According to BDSA, Arizona sales rose 48%, Oregon sales rose 38%, Colorado sales rose 19% and California sales rose 11% during the first half of the year. The Midwest has also been strong with Illinois sales reaching $380 million between January and July of 2020.
Canaccord Genuity analysts raised its 2020 cannabis sales estimates from $14.7 billion to $15 billion in order to reflect these strong trends. By 2024, the analyst expects the market to grow at a 20% compound annual growth rate to reach $31 billion in sales, based on the belief that several states will quickly create recreational programs to close budget gaps.
These trends have translated to strong financial results for cannabis companies, which reported second quarter earnings that were largely in-line or beats. Forward earnings estimates increased by an average of seven percent among public firms, according to MJBizDaily, driven by massive beats and strong guidance from GrowGeneration (GRWG) and Curaleaf (CURA).
Red White & Bloom Brands Inc. (CSE: RWB) (RWBYF), a multi-state operator with assets throughout the United States, recently reported $1.5 million in revenue and gross margins of 82% in its first quarterly financial report since its debut. Adjusted EBITDA hit $6.5 million for the quarter, but that excludes the Platinum Vape and PharmaCo acquisitions, which are expected to add about C$170 million in annual revenue for a total nearing C$200 million.
Cannabis companies in the United States have historically traded at a discount to their Canadian peers due to the uncertain regulatory situation. However, after reporting second quarter earnings, domestic stocks rose by an average of 15% compared to an 8% decline among Canadian peers, suggesting a closing of the valuation gap.
Where to Invest in Cannabis
Many cannabis companies have seen their valuations rise to Canadian peers on the top line, but many stocks still trade at a discount to their EBITDA. According to MJBizDaily, domestic companies trade with an average EBITDA margin of 28% compared to breakeven levels in Canada, which lead to a lower valuation of 15X 2021 EBITDA compared to 29.5X in Canada.
Multi-state operators, or MSOs, could be especially compelling given their improved diversification and scale. For instance, Red White & Bloom Brands Inc. (CSE: RWB) (OTCQB: RWBYF) is positioning itself as a top-three MSO in the U.S. legal cannabis and hemp sector with assets targeted at Michigan, Illinois, Massachusetts, California and Florida. The company trades with a fully diluted enterprise value of $325 million despite nearly C$200 million in projected revenue following the integration of its two acquisitions.
The company has already built an impressive footprint in three states—Michigan, Illinois and Massachusetts—with ten operating dispensaries, eight additional dispensaries ready to open, and a goal to open 35 dispensaries by Q4 2020. In addition, the company has 468,000 sq. ft. of operating cultivation and 3.6 million sq. ft. of CBD cultivation.
In 2020, management anticipates generating $166 million in revenue and $57.5 million in EBITDA through its existing operations and near-term growth plans. The company also continues to build its High Times dispensary brand throughout the Midwest, combining an operation with 350,000 transactions per year with the world’s most iconic brand.
The COVID-19 pandemic has depressed large swaths of the US economy, however, the cannabis sector has proven extremely resilient. Red White & Bloom Brands Inc. (CSE: RWB) (OTC: RWBYF) is well positioned to capitalize on these growth rates given its diverse presence across three states, unique branding and growing supply chain.
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