As the U.S. cannabis market continues to grow, the recent weakness in the sector stocks provides a great opportunity for long term gains while still fraught with high risk. The majority of the stocks in the U.S. cannabis sector are down far more than 50% from the highs reached just this year. The multi-state operators (MSOs) have major catalysts with languishing large deals in the late stages of obtaining approval to where these stocks will finally take the next step higher to general market visibility.
The U.S. cannabis sector is already massive and growing at a rapid pace. Arcview Market Research has the market reaching $12.8 billion this year and reaching $30.1 billion by 2024. The sector is forecasted to add ~$3 billion in additional revenues each year through 2024.
(Source: Curaleaf presentation)
The U.S. stocks don’t face the same problems with a lack of stores or product like in Canada, but the companies do lack access to the banking system and Federal approval of cannabis. The recent approval of the SAFE Banking Act in the U.S. House of Representatives is a significant step forward for sector, though a lot of work still needs to take place for the Senate to approve the act to provide banking and cheap capital access for the sector.
An additional nagging problem has held back the leading MSO stocks in 2019 with major deals crawling to the finish line. Curaleaf, Cresco Labs and Harvest Health & Recreation are all scheduled to close major deals in the next few months that will raise the elevation of the related companies to levels on par with the major Canadian players without the rich valuations.
We’ve delved into these three cannabis companies poised for major catalysts in the year ahead via the closure of major deals and eventual access to the banking and capital markets in the U.S.:
Curaleaf is poised to become the biggest cannabis company in the world and one of the least discussed with the Canadian players grabbing all the headlines. The company recently closed the deal to acquire Acres Cultivation, but the more important deals for Select brands and Grassroots remain open.
Both of the Select and Grassroots deals were valued at close to $1 billion when originally announced months ago. The problem here for Curaleaf and the sector is that the visibility of these deals is lost until they close with the stock only having a listed market valuation of $2.1 billion now.
The Select deal is now expected to close on January 1 after the waiting period under the HSR Act expired. The companies even changed the deal value from 95,555,556 shares to 55,000,000 million guaranteed shares and the remaining shares conditional on Select brands reaching predefined revenue targets to obtain the remaining 45,555,556 million shares plus additional revenue earnouts on 2020 targets above $300 million.
The Grassroots deal was one of the last major deals announced before the cannabis stock prices collapsed. Curaleaf agreed to pay 108.8 million shares plus $75 million in cash consideration.
In total, Curaleaf expects a business with access to 19 states with 71 retail location open, 26 processing facilities and 21 cultivation facilities operational heading towards 131 stores along with a large wholesale distribution network with the Select brand.
For this reason, analysts have the company reaching 2020 sales of $1.0 billion and 2021 sales of $1.5 billion. The company needs these deals to close for the market to fully appreciate these revenue targets with a fully diluted market cap of only in the $3.0 billion range.
Curaleaf stock has had an up-and-down year. Shares shot up nearly 100% by April, before slipping about 55% in the subsequent months. But TipRanks analysis shows that Wall Street is not so confused on where the company is headed. 4 analysts who rate the stock (in the past 3 months) say "buy," vs. one analyst who suggests "hold." With an average price target of $15.17, these analysts see over 200% premium to where shares currently trade.(Discover how the overall price target for Curaleaf breaks down on TipRanks here)
Harvest Health & Recreation (HRVSF)
Harvest Health is down over 75% from the highs above $10 back in April. Similar to the other companies in the sector, the company has multiple pending deals that will have a material increase in the market value of the stock and the size of the business.
The biggest deal is for Verano Holdings that expects to pass the HSR Act waiting period on December 4. In addition, the company has pending deals with Falcon, CannaPharmacy and Devine Holdings after closing acquisitions with Leaf Life and Urban Greenhouse. The end result was Harvest Health only reporting Q2 revenues of $26.6 million with pro forma revenues of an incredible $78.0 million once including the numbers from all of these deals.
After closing the deals, Harvest Health expects to have over 210 facilities including 130 retail locations with more than 1,700 employees across 18 states and territories. Analysts have the company reaching 2021 revenues of $1.28 billion.
The biggest problem for investors is grasping the complete financial picture with the company acquiring so many different private firms without access to the financials. Regardless, the U.S. MSO stocks are now incredibly cheap.
Harvest Health is not widely covered by the Street’s analyst corps; among those who do cover the stock, however, the consensus is a Buy. The stock shows an average price target of $15.36, implying room for a robust 445% upside from the current trading value of $4.91. This stock is bargain priced, and plenty of room for growth. (Find out how the Street’s average price target for Harvest Health breaks down)
Cresco Labs (CRLBF)
Similar to Curaleaf, Cresco Labs now has multiple deals in the process of closing. The major deal hailed as the largest public deal in the U.S. cannabis sector was to purchase Origin House (ORHOF) back in April with the expiration of the HSR Act occurring in late October.
The company has an additional deal for under $300 million to acquire Tryke. This business generated $70.4 million in revenue and $24.6 million in EBITDA in FY18.
Once these deals are closed, Cresco Labs will have 25 production facilities, 29 retail dispensaries in operation and licenses to operate 62 retail dispensaries across 12 states. The footprint will cover 154 million potential customers or 71% of the addressable cannabis market.
Analysts have Cresco Labs crossing the $1.0 billion revenue threshold in 2021 with the targets really unclear if they fully cover the revenues from all of the deals plus the expansion in Illinois due to the approval of recreational cannabis on January 1.
Most analysts on Wall Streets are out rooting for this cannabis player to be a winning stock pick, as TipRanks analytics showcase Cresco Labs as a Strong Buy. Based on 5 analysts polled in the last 3 months, all 5 rate the stock a "buy." At an average price target of $16.27, the potential twelve month gain lands at 150%. (See Cresco Labs price targets and analyst ratings on TipRanks)
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