In honor of MJBizCon and MJUnpacked in Vegas this week, we are providing the multiples from our dynamic in-the-money only comp table adjusted for all announced deals here.
As always our Premium Members can download the full Premium comp table, including new multiples adjusted for 280E.
As legislation slows and it seems that 280E may not go away soon, we are adding a new metric to our comp table:
EBIDA or earnings before interest, depreciation and amortization.
Basically EBITDA less 280E taxes because 280E taxes are essentially an excise tax on gross profit.
Most people in the cannabis sector routinely throw around pretax multiples – Enterprise Value / Sales or EV / EBITDA, especially in comparison to other industries with very different tax rates.
280E for US plant touching operators makes this analysis near worthless, unless you think 280E goes away in the very near future (and can thus capitalize the 280E tax cost at 1-2X).
(If you don’t know what “280E taxes” are, read this quick primer – basiacally cannabis in the US pays income taxes on gross profit, with no other deductions).
Fundamental equity investors ultimately do not care about sales or EBITDA, they care about free cash flow, and FCF is reduced by 280E taxes and the inability to deduct interest expense from taxes. Without operational free cash flow, the only return to equity is then what you can sell the operation for to another, be it a large CPG co or a greater fool.
For companies that pay 280E, the Federal and State income tax rate is applied to gross profit, and then subtracted from consensus EBITDA, using the state where the company is incorporated. For non-280E companies, Federal and State rates are applied to consensus pretax income.
Is this perfect? Far from it. We admit this is merely “less wrong”, but we are tying to be approximately right vs. precisely wrong, and doing so in an intellectually honest way.
Why not just use Price/Earnings (PE) ratios?
Many cannabis companies are indeed positing earnings, but many still are not. PE ratios are pretty easy to calculate but they still require the accurate calculation of the shares outstanding, and can be thrown off by accounting charges
We have seen too many mistakes in sell side models that drive consensus to trust that the earnings per share for a given company is calculated correctly. Ours is more of an operational after tax cash flow.
Sell side models usually focus far more on getting sales and EBITDA right than accurate tax or share outstanding calculations. We have seen models that forget 57% of the shares outstanding, have earnings without 280E at all or incorrectly (for example deducting interest expense for 280E taxes).
We would rather take the best consensus number of EBITDA, properly apply a best estimate of the tax rate, and use our manually calculated dynamic shares outstanding and net cash/debt calculations for the enterprise valuation.
Our plan is to have accurate and thoughtful operational models for all companies as we do for Weedmaps and Glass House today; once we do, we would transition to PE, but there is only so much time in a day.
We hope to see you at MJBizCon and MJUnpacked! If you’d like to meet, go to our Contact Us page.