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Four weeks ago, we discussed headwinds and tailwinds ahead in 2020, concluding that “things are good and getting better in the U.S.” despite the weakness in equity prices. As we look forward, we think that the single biggest driver of improved stock performance for many of the American MSOs and ancillary players will be simply strong revenue growth and improved profitability.
Q3 was a breakthrough in terms of revenue for leading companies, as Trulieve, GTI and Curaleaf all surpassed the leading Canadian operators in terms of revenue, and we think investors will be pleased, if not excited, when the Q4 numbers hit in March and April as well as throughout the rest of the year.
While analyst estimates are typically overly optimistic, we think it is worth reviewing expectations for some of the leading MSOs by revenue.
The companies will be experiencing strong growth based on same-store sales, prior acquisitions, new store openings and, in some cases, pending acquisitions.
The table below includes the current market cap, the revenue reported in Q3, the expected revenue in Q4 (per Sentieo) and the expected revenue in 2020:
The table is sorted by expected 2020 revenue, which includes pending acquisitions for the top three names.
Note that the market caps don’t include shares to be issued for these pending deals. We have annualized expected Q4 revenue to get a price to sales ratio, which allows a bit more of an apples-to-apples comparison, Note that the ratio, in all cases, is below 10X.
On a forward basis, even adjusting for shares to be issued in pending acquisitions, all of the market caps are less than 4X forward sales. We caution readers to look a bit deeper than just the price to sales ratio and consider profitability as well as net debt.
Our takeaway is that revenue growth and likely improved profitability will help broaden the investor base for leading MSOs.
The next IPO wave
These six MSOs are expected to generate in excess of $3 billion revenue in aggregate next year.
Finally, as we look ahead to future earnings reports, we want to share a heads-up with our readers something that hasn’t yet been widely reported: Many companies that have primary listings in Canada are going to adopt U.S. GAAP accounting beginning with Q4 as a result of their shareholder base being primarily American rather than Canadian.
The major impact will be the riddance of IFRS-mandated accounting of biological asset value changes, leading to less volatility in reported gross margin and operating profits. This list includes Canopy Growth, Cronos Group, Green Thumb Industries, iAnthus Capital, and Village Farms, and perhaps we will see more companies transition.
PLUS Products is a hyper-focused CPG company, operating in the most valuable part of the supply chain by producing branded goods.
The company has an early leadership position in California, and it is taking a successful formula to new markets, new products and new consumers, initially with its recent expansion to Nevada.
With a nation-wide launch for a 100% Hemp CBD edible line underway, PLUS has partnered with John Legend and Casper to accelerate the adoption of three distinct product offerings.
Get up to speed by visiting the Plus Products Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures.
Click the blue Follow Company button in order to stay up to date with their progress.
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Exclusive article by Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry.
This $1 Marijuana Stock on the Verge of Breakout?
With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances.
Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management.
A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV.
Marijuana IPO’s in 2019
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