Many industries are continuing to struggle even as the markets have reopened in several geographies following pandemic-led lockdowns. However, cannabis demand continues to be strong amid the pandemic.
As per New Frontier Data, US states, which have legalized cannabis, are seeing an average rise in spending per consumer of 23% since the beginning of this year. And August expenditures per user were 17% higher on an average Y/Y though there was a slight drop from the initial spike in 2Q.
We will discuss how cannabis companies Green Thumb and Hexo are positioned currently and use the TipRanks’ Stock Comparison tool to see which stock offers a better investment opportunity.
Green Thumb Industries (GTBIF)
Chicago-based Green Thumb Industries is a leading US cannabis grower. It has 13 manufacturing facilities and owns licenses for 96 retail locations and operations across 12 US markets. It sells branded cannabis products through its retail cannabis stores –Rise and Essence. Green Thumb is among the few cannabis companies that are generating operating profit.
The company is benefiting from the rising demand for medical and recreational cannabis in the US with its revenue in the first half exceeding its full-year 2019 revenue.
Second-quarter revenue surged 16.6% sequentially and 167.5% Y/Y to $119.6 million driven by strength from the consumer packaged goods and retail businesses, mainly in Illinois and Pennsylvania. Adjusted operating EBITDA surged 38.6% sequentially and about 145% Y/Y to $35.4 million.
Expansion efforts continue to boost Green Thumb’s performance. In July, the company completed construction at its Toledo Processing Facility in Ohio and is on track to complete its Illinois and Pennsylvania expansion projects in the third quarter. These three facilities will roughly double the company’s capacity in those markets.
Moreover, the company added six retail stores in the second quarter, thus operating 48 stores in 10 states by end of the quarter. Green Thumb is also investing in its e-commerce platform and enhancing its digital storefront.
On September 2, Cantor Fitzgerald analyst Pablo Zuanic increased the price target for Green Thumb to $29 from $27 and maintained a Buy rating. In a research note to investors, Zuanic explained that deregulation "tailwinds" and "constructive" sales stats in the months ahead should continue to push up multi-state operator stocks.
The analyst believes that Green Thumb has the best profitability among his Buy-rated names and "has the complexity risk of scale and deal integration.” He also thinks that sustained profitability of over 30% EBITDA margins combined with franchise strength in key states will drive EBITDA multiples over time to at least 20 times. (See GTBIF stock analysis on TipRanks)
The Street mirrors Zuanic’s optimism with a Strong Buy consensus based on 8 Buys and no Holds or Sell ratings. Green Thumb stock has risen by an impressive 42.2% so far in 2020 and the average analyst price target of $22.80 indicates an upside potential of 64.5% ahead.
Canada-based pot company Hexo has been under tremendous pressure over the recent months. Slower-than-anticipated retail store rollouts in Canada, delay in approval for cannabis derivative products in Canada and the impact of marijuana sales in illicit markets impacted the company’s performance.
In June, the company sold its Niagara, Ontario facility citing “excess of cultivation capacity in the market and estimated forecast demand for cannabis products, as result of slower than expected market development.”
Moreover, in April the company received a delisting notice from the NYSE as Hexo shares were trading below $1 for a consecutive 30 trading-day period. The company has time till Dec. 16 to regain compliance with the NYSE listing rules.
Meanwhile, the company’s fiscal 2020 3Q (ended April 30) net revenue grew 30% sequentially and 70.4% Y/Y to C$22.1 million. Adjusted EBITDA loss improved to C$4.3 million compared to C$8.5 million in fiscal 2020 2Q as well as in fiscal 2019 3Q.
Hexo stated that its plan to deliver a positive adjusted EBITDA in the first half of fiscal 2021 depends on the growth of retail stores in its two largest markets, Ontario and Quebec. It highlighted uncertainty related to the timing of new licenses for new retail stores in Ontario and the build-out of additional stores in Quebec.
At the same time, Hexo recently marked its entry into Israel's medical cannabis market through a two-year agreement with Breath of Life International Ltd. In April, the company expanded its partnership with Molson Coors to form a joint venture called Truss CBD USA to make non-alcohol hemp-derived CBD beverages in Colorado. In August, the Canadian joint venture of Hexo and Molson Coors – Truss Beverage Co. launched five CBD and THC-infused beverage brands in Canada.
On July 22, Cantor Fitzgerald analyst Pablo Zuanic upgraded Hexo to Hold from Sell and increased the price target to C$1.25, up from C$0.90, citing improving industry and company trends and the investing opportunity arising from the company's recent pullback.
Zuanic further stated that he expects the stock to at least perform more in line with the group based on solid underlying sales trends in the April quarter, improving profitability and targeting positive EBITDA by fiscal 2H21. (See HEXO stock analysis on TipRanks)
Hexo stock (listed on NYSE) has plummeted 57.2% year-to-date but the average analyst price target of $0.86 indicates a possible upside of 24.6% in the coming months. The Street has a Hold consensus for Hexo based on 1 Buy, 2 Holds and 1 Sell rating.
Green Thumb looks better
Green Thumb’s operational performance and its stock movement have crushed Hexo so far this year. Moreover, the Street’s bullish stance and strong upside potential in the stock make Green Thumb a more compelling investment opportunity than Hexo.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment