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Tilray’s Added Capacity Should Help Future Earnings

Will Ashworth

British Columbia-based Tilray (NASDAQ:TLRY) announced plans May 8 to increase the production and manufacturing footprint at three of its Canadian facilities. The additional 203,000 square feet increases its total footprint by nearly 20% to 1.3 million.

Tilray’s Added Capacity Should Help Future Earnings

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What should have done wonders to Tilray stock did absolutely nothing for the cannabis stock, as it lost 2.5% on May 8. As I write this mid-afternoon on May 13, it’s down more than 9.1%. Of course, it didn’t help that it announced at the same time the U.S.-China trade war was heating up.

Tilray delivers its quarterly earnings tomorrow (May 14). While there won’t be any effect in the near-term from its additional production space, the long-term benefits could be significant. Here’s why.

Bigger Might Be Better

Adding 20% production space to a manufacturing company’s footprint is generally a big deal. The more square footage that is devoted to producing products, the greater potential there is for higher revenues. If profitable, more money flows to the bottom line, delivering a return on its capital.

In the cannabis business, it’s not quite as simple.

Because so few cannabis companies are profitable, any addition to top-line revenue doesn’t immediately result in a return on capital. In the near term, the increase in square footage at Tilray plants in Leamington and London, Ontario, as well as Nanaimo, B.C., will be a $32.6 million drain on its capital with a negligible return on investment.

It’s not the same as Tilray’s acquisition of Manitoba Harvest in February for $316 million, a deal that will see the company selling its hemp-based food products in more than 13,000 points of sale in the U.S. including Costco (NASDAQ:COST), Walmart (NYSE:WMT), and most of the other big food retailers.

“Retailers are seeing hemp mania, it’s one of the fastest-growing products right now,” said Bill Chiasson, chief executive officer of the Winnipeg-based company. “All of them are looking at bringing on products that contain CBD into their portfolio and every one of them has come to us and said they see us as a natural partner.”

In 2018, Manitoba Harvest had annual sales of C$94 million.

Let’s assume that 5% of those sales flow to the bottom line. Tilray paid C$277.5 million in cash and stock up front, another C$92.5 million at the end of August and potentially another C$49 million in Tilray shares at the end of 2019 should Manitoba Harvest hit specified financial targets.

Tilray’s return on capital for the Manitoba Harvest acquisition started on day one after the deal closed and will continue to reap dividends as it makes further inroads into the North American retail market.

Furthermore, it helps beautify Tilray’s income statement.

Long-Term Plans Good for Tilray Stock

In 2018, Tilray had sales of $43.1 million and a net loss of $67.8 million. By adding Manitoba Harvest, it increases the company’s top-line revenue by 162% while reducing the net loss slightly. More importantly, it helps diversify the company’s revenue streams

In January, before the Manitoba Harvest deal, I said CEO Brendan Kennedy’s acquisitions had done little to move Tilray stock. That hasn’t changed. TLRY is down 34.7% year to date through May 8.

I’ve said on several occasions in 2019 that my three favorite cannabis stocks are Canopy Growth (NYSE:CGC), Cronos Group (NASDAQ:CRON), and Hexo (NYSEAmerican:HEXO).

I’ve yet to add Tilray to the list, but announcements like the one it just made show that Kennedy is sticking to a game plan that includes medicinal and recreational pot, hemp and hemp-based foods — and anything else that can provide a strong foundation on which to grow internationally.

It’s not flashy, but the long-term results could be worth the wait. Just don’t expect a bump from the 203,000 additional square feet until sometime in late 2019 or early 2020.

We’ll know more on May 14.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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