The cannabis sector remains the wild, wild west and Curaleaf Holdings (CURLF) provided a prime example over the last week. The company was turning into a beast in the cannabis sector and a FDA Warning Letter raises major doubts about their CBD products. The company should get over this speed bump in no time.
The U.S. multi-state operator (MSO) is in the process of closing two major acquisitions costing nearly $2 billion that will position the company for sector scale under appreciated by the market. The stock rallied nearly 20% on the latest deal to buy Grassroots.
Unfortunately for shareholders, the rally didn’t last as the FDA send Curaleaf a warning letter on July 22 regarding their CBD products. The government agency claims the company is positioning their CBD products as unapproved new and misbranded human drug products.
The issues involve CBD products such as lotions, oils, pain-relief patches, vape pens and dog products that make claims about helping with chronic pain and anxiety. The FDA ruled recently that companies could not market CBD products having any benefits to consumers and pets. Such claims would require new drug applications that require the company to provide research backing those claims.
Curaleaf is required to respond to the FDA within fifteen working days and is required to correct any violations connected with the marketing of CBD products. The CBD sector is the wild, wild west so lots of questions will exist on the impact to the marketing and sales of CBD products, if companies can’t make any claims about potential benefits of the products.
The recent news surrounding the CannTrust audit failure with Health Canada further clouds the news with Curaleaf. The later appears to have a simple solution of changing the marketing of CBD products, but the news will weigh on the stock until a final remedy with the FDA.
The unknown for Curaleaf is the revenue impacts from the FDA and predictions for both the Select and Grassroots acquisitions. Neither deal has closed yet, but the companies don’t appear to face any major regulatory hurdles.
What is known is that these two new businesses had Q1 revenues of over $50 million and easily topped Curaleaf down at only $35 million. On the Grassroots acquisition call, management was clear that the company would provide guidance for these new entities along with Q2 results and that Wall Street would be impressed. This FDA issue could provide an opportunity to buy Curaleaf on weakness.
Beacon Securities placed some financial projections on the entity that will indeed make the market stand up and notice Curaleaf. Analyst Russell Stanley made these projections for 2020/2021:
- 2020 revenue – $1.12 billion
- 2020 EBITDA – $380 million
- 2021 revenue – $1.60 billion
- 2021 EBITDA – $685 million
Curaleaf only trades at about 6x the 2021 EBITDA target with the stock back down closer to $7 after topping $8 on the Grassroots deal.
The key investor takeaway is that Curaleaf is building a cannabis market leader under the radar of most investors even in the cannabis sector. As market projections for revenues in the billions start being absorbed by the market and the FDA issue is resolved, the stock will rally and claim one of the highest valuations in the cannabis sector, if not the largest.
Compass Point analyst Rommel Dionisio has recently initiated coverage on Curaleaf stock with a Buy rating and $13 price target, suggesting the stock can rise about 50% from current levels. (To watch Dionisio's track record,click here)