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Comp Table updated for April 30, 2021 – Now Using Cashless Exercises for Warrants and Options
Premium members can download a PDF of our cannabis comp table, updated on April 30, 2021 below.
Cannabis stocks were weak in March after peaking in mid-February, but then the sectors bifurcated in April.
The US operators are down 23% on average from their February peaks, while the Canadian operators are down 48% on average – primarily driven by the 71% decline in Tilray and 64% decline in Sundial (after the Reddit-fueled insanity we discussed here).
Though both sectors declined in March (US down 13% on average and Canadians down 8% in March), the Canadian operators continued to decline 12% on average in April, while the US operators actually increased 3% on average in April.
The average valuations for the US operators are relatively unchanged at 6.6X 2021 sales and 22.8X 2021 EBITDA, vs 6.6X and 23.3X respectively in our last table on March 5.
The multiples for the Canadian operators compressed to 14.1X 2021 and 10.1X 2022 sales, from 14.9X and 10.9X sales respectively on March 5.
With the launch of our Premium services, only Premium Members will be able to access the detailed comp table going forward. Compared to the past tables available to Free Members, the Premium Members’ table has more data including:
- the current pro forma in the money only share counts
- current cash on hand
- pro forma net cash or debt if you would like to deduct net cash from your own enterprise values (as we do not deduct net cash since it is not excess and will be invested)
- Sentieo’s version of downloaded FD shares, market capitalization, and enterprise value, to highlight divergences
Cashless Exercises Make Share Counts More Dynamic vis a vis Stock Price
We have switched our comp table share calculation to cashless exercise of options and warrants from cash exercise in the past.
The net effect is that share counts now change with every move in the stock price, while with cash exercises they only changed at the strike prices of warrants and options (convertible debt is still exercised at cash, which we will detail in a future article).
Why does this matter? Because no active fundamental investor invests for the current price; they invest for a future price, yet the dilution increases with every increase in the stock price.
After you’ve done all your fundamental analysis to determine a company’s enterprise value, how many shares will there be? How is that future value split up?
If you use the current share count at the current stock price (or worse, the shares outstanding 2 months ago with no warrants at all), you will be overstating your return and understating you dilution.
Let’s use Aurora Cannabis as an example. In the chart below, the black line is the share count using cash exercise, the purple line is the share count using cashless exercises, and the green line is the enterprise value using cashless exercise shares and ignoring net cash. To use this, you look up your target valuation on the green line and then look at the share count implied on the purple line and the share price below.
Using our dynamic share counts, the target is $46.79, or a 432% return from the current price. Yet if you use the share count downloaded from software, you will overestimate your return by calculating $59.52 and expecting 566% return – you will be disappointed by 22%. Even if you use the point in time shares from our comp table at $8.94, you will still over estimate the target at $50.33.
How can you manage a portf0lio with wrong data?
How can an active investor properly weight their positions if they expect Aurora to rise 22% more than it truly would with the correct math? How can a portfolio manager properly weight positions when ALL of them have such dynamics? How can a portfolio manager intuitively understand how value accrues to the equity holders vs the warrant holders under different scenarios?
What if you are an M&A team looking to acquire a company for a 50% premium, yet there are 20% more shares at your target valuation?
What if you are a private investor who thinks they are buying 19.9% of a company but you only buy 18.5% (like British American Tobacco did with Organigram)?
This is an issue endemic to nearly all companies in the cannabis industry because of the significant use of warrants and options to complicate the capital structures; it is not a commentary on Aurora specifically.
At the end of the day, the warrants shift incremental value to the warrant holder vs the common shareholder. This is fine to align incentives, but the common shareholder must be aware of the shell game where they expect to capture an equal share of the company’s upside. In the Aurora example, the shareholder using the downloaded shares would expect a 566% increase in the enterprise to result in a 566% increase in the stock price, when actually the enterprise increases 463% and the common captures only 423% of the return and the warrants gain the rest.
We at MJResarchCo have these shares vs. price charts for most cannabis names and are working on publishing them to Premium Members soon.