Why do we think comp tables are so important?
They are the key tool in understanding investment opportunities and risks in an industry.
- provide a menu of available public investment choices for purchase or sale
- show the range of valuations of the choices, showing discrepancies that may or may not converge in the future. Public valuations also inform private company valuations and acquisition pricing
- show the size and leverage of the public options
- show the range of operating margins and opportunities for margin expansion or compression
- show the cost of capital for companies and the industry, which can be applied to similar companies in the private market either raising new capital or deciding whether to sell to another company
- on the second page, the stock price performance shows what is moving up and down, helps isolate specific performance vs peers and the broader market
Tracking the multiples over time shows trends in a company’s cost of capital and shows the potential upside and downside based on the company’s and the sector’s historical high and low valuation.
The Complexities of Cannabis
Most industries’ valuations can be automatically calculated with publicly available information by financial tools such as Factset, Bloomberg, Sentieo, or YCharts.
For cannabis, however, these automatically generated tables are almost always wrong because:
- These downloads often do not include the warrants and options in the most cannabis company equity stacks
- Convertible debt is often split into the “Debt” portion and the “equity” portion on the balance sheet, but in real life the security will either be debt below the strike or equity above the strike.
- Downloads do not include equity and debt offerings subsequent to quarter end, and never include the associated warrants.
- they also do not adjust for acquisitions, nor future earn outs of closed acquisitions
- Sometimes “fully diluted” shares actually include warrants that are so far out of the money that they have little chance of being exercised, and thus should NOT be included in the capital structure (unless you expect a repricing which has happened in cannabis). An example is TGOD’s 14.5 million warrants striking a C$9.00 and $9.50 vs the current price of C$0.31.
When calculating your target prices, realize that the dynamic share count from the options and warrants and convertible will result in dynamic share counts, so your share count in your target valuation may different than today.
If you are setting a target valuation for a company with 100 million shares at $5 today, and your fundamental math says it will be worth $1 billion, that would normally be $10.00 per share on the 100 million shares. But if there are 20 million warrants striking at $9.00/share, you’ll need to use 120 million shares which yields either $8.33/sh if you ignore the $180 million cash raised and $9.83/sh if you include it.
Either way, the target is NOT $10.00/share.