Early signs of consolidation in cannabis nutrients?
Over 4,000 years ago, early farmers noticed enhanced crop growth in areas of manure accumulation where animals gathered, and the first fertilizer application practices were born.
The Babylonians, Egyptians, and Romans all used manure, and farmers found that bones were even more effective crop nutrients by the 1700s. By the early 1800s, the United States had built a thriving business of exporting bison bones into Europe for farming.
(A pile of bones, to be used for plant nutrients. Source: Burton Historical Collection, Detroit Public Library and Crop Watch at University of Nebraska)
In the 19th century, German scientist Justus von Liebig established modern agricultural chemistry after determining that nitrogen, phosphorus, and potassium are essential to plant growth.
Today, the largest crop nutrient companies operate like any other commodity manufacturer, competing in an ever-consolidating oligopoly with margins hitched to the underlying input prices, trade policies, weather, and macro-trends like inflation.
The cannabis nutrient industry is still in its nascency. The products are highly fragmented, despite minimal differentiation, and consolidation awaits. Fortunately, the category has been protected from the larger, traditional agriculture players primarily because of use of grow media in indoor facilities versus live soil in outdoors requires different formulations, and also because of the varying macronutrient needs of cannabis at varying growth stages.
The first major fertilizer acquisition occurred in 2015, with Scott’s Miracle-Gro acquiring General Hydroponics for $135M, a leading market share player, and this represented Scott’s largest acquisition since the 1990s. The company proceeded to buy another nutrient leader, Botanicare, the following year, in addition to numerous cultivation equipment companies.
And until recently, the cannabis fertilizer business has remained quiet and competitive.
GrowGeneration, a roll-up of hydroponic retailers, has been mentioning their intent to develop private label brands since late 2019, and although it seemed the initial path was to internally develop products like their outdoor nutrient brand Sunleaves, their 2021 guidance for 10% of revenues coming from private label was a nod that they would be more active on the M&A front.
In late December of 2020, GrowGeneration acquired the brand Power SI, a leading silicic acid company that basically supports horticultural crop resistance to pathogens and stress. Power SI was founded in 2019, and based on managements’ comments, the brand generates over $13.5 million in annual revenues.
In March, they acquired Char Choir, a coco coir grow-media company touted as a sustainable alternative to rockwool. While not a fertilizer, both coco coir and Rockwool are increasingly common mediums among commercial growers because of their ability to maintain moisture and hold nutrients. Char Choir is expected to generate over $19M in annual sales.
Hydrofarm, a cultivation equipment distributor and manufacturer and both a partner and competitor of GrowGeneration, is following a similar path of bringing consumable products in-house.
In April, Hydrofarm acquired Heavy 16 for $78M or roughly 3.4x TTM revs and 7x EBITDA, and this was the company’s first acquisition since going public in December. Heavy 16 provides a suite of plant nutrients for each stage of the cannabis grow cycle.
Earlier this week, Hydrofarm announced another acquisition. They purchased the nutrient line brand of House & Garden for $125 million, or 2.2x TTM sales and approximately 7x 2021 AEBITDA.
We expect these transactions may be the early signs of consolidation in the highest margin category of cultivation consumables, as it’s a logical strategy for both companies.
Leveraging their growing retail footprint, GrowGeneration will be able to provide these high-margin and high-frequency purchase products to cultivators on-demand. The retail stores will become distribution centers in attractive locations across the country.
Hydrofarm will be able to harness their cultivation and hydro-retail relationships to grow the market share of their fertilizer products while expanding internal margins.
Scott’s Miracle-Gro arguably best positioned to participate in the consolidation, with their extensive big-box relationships and brand reach, and in their most recent conference call they noted most of the M&A pipeline is on the cannabis-focused, Hawthorne side of the business.
The risk to these companies is the trendiness and inevitable commoditization of these products. While brands like House & Garden have created an established reputation with the cannabis community, there are few barriers for new entrants like Power SI, and beyond the brand, these products are ultimately a mix of 3 primary ingredients: nitrogen, phosphorus, and potassium.
Redditt moving Prices but Volumes far from past peaks = more to come?
The Canadian operators are showing dramatic increases in prices since our last comp table on May 17, specifically TGOD up 61% on no news, Aurora up 41% since presenting at BMO and announcing a $300 million ATM offering and switching from the NYSE to the NASDAQ starting May 25, and Tilray is up 20% on no news.
The dollar volumes of these stocks started to spike in the last two days of the month but remain far off the past peaks (like February 11 when the Canadian operators traded $25 billion in a day and Tilray traded more than Amazon).
The daily US$ volume of Canadian Operators has increased from $652 million on May 17 to $1.1 billion on May 27 and $2.5 billion on May 28, but remains below the $4-25 billion peaks seen previously. In contrast the combined US operators have increased to only $104 million from $69 million.
The question is if a February-sized Redditt wave is coming or if they have run out of steam. Perhaps there are more speculative meme-fueled gains to come for the Canadian operators, though this is a nonfundamental investment strategy we would not employ as we recognize that we do not have the insight to time the sale (best of luck to you if this is your strategy). We know the game we can play and and those we can’t, and try to stick to what we know.
Valuations start to Expand
The valuations for Canadian cannabis companies have started to expand given rising stock prices and declining estimates since our last comp table on May 17, while the US operators are flattish on higher estimates.
The Canadian operator average rose to 16.4X 2021 and 11.0X 2022 EV/Sales, up from 13.1X and 8.8X respectively on May 17, as the stocks rose an average of 26% and the average estimate declined 4%.
The US operators ended May at an average of 6.2X 2021 sales and 21.9X 2021 EBITDA, and 4.1X and 13.2X on 2022 sales and EBITDA, respectively.
For May, the Canadian operators increased 9% (driven by an 8% rise on May 28 and 26% rise since May 17) while the US operators declined 7% on average, compared to a 0.7% rise in the S&P 500, 0.3% increase for the Russell 2000, and -1.2% decline for the NASDAQ 100.
As always, Premium Members can download the detailed comp tables priced for May 28 below. They have been updated for new filings, earnings reports, and deals reported last week.
As of 5/31/2021, the authors have a position Hydrofarm mentioned above. They make no commitment to update holdings in these positions.