Extraction cannabis company MediPharm Labs (MEDIF) has been accelerating its upward growth trajectory at the right time, as Canada is poised to give the go ahead for derivatives to be sold in the country.
The good news is the company has managed to boost revenue significantly while turning a small profit, before the regulations go into effect on October 17, 2019, and distribution to dispensaries starting in the middle of December 2019.
Two of the most popular derivatives expected to generate strong revenue are edibles and infused drinks. Other derivatives include concentrates, gel caps, tincture oil and vape pens, among others.
In this article we'll look at why the timing for this couldn't be much better for MediPharm Labs, and why it could surprise many investors to the upside.
Strong performance in limited market
In the second quarter MediPharm generated C$31.5 million in revenue, bringing it into the top five in cannabis related sales for Canadian-based companies. That was up 43 percent from the prior quarter's sales results. Gross profits in the quarter jumped to C$11.3 million.
The most important takeaway there is this is happening far before the regulations go into effect in Canada. The implication is MediPharm will without a doubt do far better than it has been once it offers derivatives to the Canadian market.
Since it won't have any meaningful impact on the company's performance until the completion of the first calendar quarter of 2020, investors will have to wait until the first earnings report afterwards to see how much of an impact it's making on the top and bottom lines of MediPharm.
The positive there is derivatives command higher prices and wider margins, which should push the company further into the black. The unknown is how much the costs associated with the expansion of its Barrie, Ontario, extraction facility to 300,000 kilograms a year will eat away at its earnings in the near term.
Operating income in the last reporting period was about C$4.1 million and earnings per share a very modest C$0.01. So it's easy to see that costs could temporarily put a damper on the results of the company, but once the expansion is completed, it'll go in the other direction.
That could continue on in the future because management said it's going to boost the annual extraction capacity of the company to 500,000 kilograms. Even so, the costs there shouldn't be hard on the company because by that time it should be fully into the process of selling derivatives in Canadian dispensaries.
Again, investors should note that the strong performance of MediPharm has come without the benefit of the loosening of regulations in Canada. Once that happens, the numbers will vastly improve over time.
Once headwind to consider
The share price of MediPharm, after its earnings release, has retraced itself, and I think the major reason there has nothing to do with the company and its fundamentals, but more with the uncertainty in the broader market.
Fear has been permeating the markets lately with uncertainty surrounding the trade wars, fears of an upcoming recession, and the resultant moving of capital to safer investments.
With the cannabis market being considered a risky bet at this time, it's certain the downward pressure on share prices of many cannabis companies has come from a move to safety, and some of the disappointing earnings reports that have caused questions about how long it'll take before pot companies will be profitable, and in some cases, if they'll even survive.
I don't believe MediPharm is one of those, but for the most part, the entire cannabis sector has taken a temporary hit. MediPharm has partaken in that downward pressure, which I believe will subside over the next couple of months; especially for Canadian companies with heavy exposure to the cannabis derivative market.
At this time MediPharm is one of the leading cannabis extraction companies, and with the freeing up of regulations in the Canadian market, it is positioned to ride the trend to rising sales, and presumably, increasing earnings.
The only question on earnings is how much the costs of expansion at its facility will take away from the results. Further out, it will be clear sailing after the full build-out is complete.
I think MediPharm is flying under the radar of most investors at this time, but as it continues to outperform and gain the benefits of increased revenue and earnings from the Canadian cannabis derivative market, it should catch even more of a bid and enjoy a sustainable upward move in its share price.
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