Party Like it’s 1999 – or 2004?: Comp Tables 2/5/2021

by | Feb 8, 2021 | Comp Table & Market Commentary

The average US operator increased 20% since our last comp table on 1/29/21, but the average Canadian stock increased 24%, led by a 42% increase in Tilray.

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The massive increases were driven by improved odds of US federal legalization in the Senate by Senators Schumer, Booker and Wyden, which as we have said before would significantly improve the accessibility and lower the cost of capital for the US operators, while doing little for the Canadian operators.

The secular cannabis investment theme of increasing legalization efforts is accelerating.

And yet the Canadian operators continue to rise because of the liquidity offered by the NASDAQ and NYSE.

The Tier 1 Canadian operators (Aphria, Aurora, Canopy, Cronos, and Tilray) traded $4.4 billion in US dollar volume on February 3, while the Tier 1 US operators (Curaleaf, Cresco, Green Thumb, and Trulieve) traded only all the US operators traded a total of $177 million, and ALL the US operators combined traded only $321 million.

So 4 Canadian operators, which have lower/negative profitability, a smaller home market, a higher valuation, and no fundamental advantage if the US Federally legalizes, traded 14X more than then ENTIRE US, which has 29% EBITDA margins on average, constrained capital availability, excessive tax rates to be resolved by said legislation, and is already profitably operating in the largest market in the world which is also growing with state legislation as well.

This is because most institutional investors cannot buy stocks breaking federal law and/or trading on the OTC and CSE.

As I wrote about our investment philosophy this week, I understand why the Canadian operators are rallying on US legalization. I just don’t fundamentally agree with it, and it provides an enormous opportunity for those who can invest in the US Operators.

But this also shows the upside potential once the US plant touching operators can uplist to the NASDAQ – and the downside risk for the Canadian operators when they get sold to reallocate exposure to uplisted US operators.

This is the technical bull case for Overweight US operators / Avoid Canadian operators.


US Operators Attractive vs Consumer Valuations

But the valuation supports it as well, as the US operators remain reasonably valued compared to other consumer businesses.

On a valuation standpoint, though the US stocks have run, they are actually not that expensive for a 20-30% margin consumer growth business – never mind one that will have a double digit CAGR for a decade from legalization efforts.

The US operators trade at an average of 25.9X EBITDA, and the Tier 1 US trades at an average of 23.5X.

This is actually cheaper than many other consumer businesses, like smaller alcohol: Boston Beer trades at 28.6X, and Brown Forman trades at 29.5X on 2021.

Or how about another vertically integrated omnichannel branded consumer product trading at 31X 2021 EBITDA growing 24% and generating 26% EBITDA margins? This is lululemon, and it isn’t about to get a lower tax rate, better access to capital, and expand their market with new legislation.

Or how about 22X 2021 EBITDA for a 20% margin branded consumer company with a franchise model growing mid single digits? This is Domino’s Pizza.

In contrast, the Canadian operators don’t even have EBITDA to calculate a multiple, and trade at a rich 22X 2021 sales – 3X the valuation of the profitable US operators. Cost-cutting deal posterchild PF Aphria-Tilray trades at a pro forma 48X 2022 EBITDA and 33X 2023 EBITDA.

Of course, anyone investing in the space is probably using their own estimates, rather than the consensus estimates used in these multiples.

Not all are equal…

I do not mean for this to sound too boosterish. But there will definitely be winners and losers in this.

Not all companies will capitalize on the macro opportunity equally. There will be plenty of investments that do poorly, in both Canada and in the US, and some Canadians will succeed.

We are already seeing increased speculation, and capital raises by increasingly speculative issuers in the public markets, echoing speculative memories.

I remember people making 4X their money in a few weeks on a tip about the “Netscape for cell phones and TVs” or the promise of “Amazon for cable TV”, with little revenue or profit.

But don’t let speculative companies raising capital to an optimistic and misinformed public obscure the fact that legalized cannabis is a multidecade growth opportunity where well-run, quality operators will emerge and create a ton of value.

For historical context of volatility vs opportunity, look to Amazon – which declined ~90% from 2000 to 2002, then rallied 10X to $60 in 2004 from a low of $6 in 2002. If you sold at $6, and didn’t buy back in the ensuing year, you felt pretty stupid, since your investment thesis was still right.

But the key to remember is the moves today are going to be rounding errors on the future value created by the winners, and the top players of tomorrow may be private today (as Google was before 2004) or not even exist (Facebook only started in a dorm room in 2004).

I remember revisiting the Amazon thesis in 2010 with a famed tech investor, whose thesis was basically “this is Walmart with a much bigger market” that could justify much larger valuations with a simple TAM penetration analysis.

It struck me as a little too simple – and that was a 2,443% dismissal.

I’m not saying cannabis will be equal to one of the biggest companies in the world, but I am trying to put the 492% average bounce off the lows in context of the larger opportunity.

It is the early days for cannabis.

Disclaimer: This is not investment advice or solicitation, and these reports will be provided to our members for free, for a limited time.

As of 2/8/2021, the author personally owns positions in Cresco Labs, Curaleaf, Green Thumb, Harvest Health, and Village Farms, and makes no commitment to update his positions. He is merely putting his money where his mouth is.

MJResearchCo has no business relationship with any of the companies mentioned in the article.