As most of you know, we strongly believe that the big returns and gains in the coming 3-5 years will be made in the US. Earnings season, traditionally the month of November has now come and gone, and the results have been impressive, to say the least.
This is the biggest potential recreational market on the planet and is showing signs of significant growth, in all areas of the market. Overall, the revenue numbers were impressive, with north of 100% year on year growth the norm. However, is the cash burn (being used to drive and grab and growth) that is becoming a concern.
Some of the big US companies are burning cash at chronic levels (pun intended), and investors are starting to question their ability to manage growth and cash flows. In their defense though, is the fine line between being too conservative (and looking for bottom line over expansion) and not being conservative enough. After all, this is a fledgling industry where right now, it's first in best dressed in every State in the US.
In the future, look to even bigger revenue numbers as some of the recreational states start to slowly mature (California in particular in 2019) and even profitability (there are currently only three that are profitable).
Below is an overview of the Top 10 from the recent Earnings Season. So who fared best?
As can be seen from the table, Trulieve and MedMen delivered stellar Q3 revenue, however, the difference being that Trulieve is a sing state operator (Florida only) while MedMen is a Multi-State Operator (MSO). iAnthus only recorded $1m in revenue, but we have combined this with the revenue from its impending transaction with MPX. Although the MSO's dominate the earnings, the Hemp players (Charlotte's Web and CV Sciences) delivered strong growth alongside, pure ancillary player, KushCo Holdings.
However, even with the above earnings, only Trulieve, Charlotte's Web and CV Sciences delivered a profitable quarter. The rest of them continued to burn cash, as they adopt aggressive multi-state expansion plans. At some point, however, we feel investors and shareholders are going to demand some level of profitability and better cash flow management.
Current Market Caps
Revenue continues to be the headline number that investors use as a benchmark for success. These numbers should then be looked at against the companies market caps in order to determine "relative expensiveness".
It is a well-known fact that the cannabis industry is dominated by overvalued companies. Companies that are valued on "future growth and earnings" and some of which sport ridiculous valuations for their current size and reach.
If one considers the above market caps in relation to their recent earnings, the most expensive stocks are Curaleaf, Green Thumb Industries, and Liberty Health. It is Liberty that is most concerning, given its connection to the recent Aphria short-sell report, and its reliance on Florida alone. Make no mistake, we like Liberty Health, but feel that until they are able to branch out into other states, this is a risky play.
The cheapest stocks based on the Market Cap/Revenue basis would be KushCo, CV Sciences, and iAnthus. We have always been extremely bullish of KushCo and believe they are well placed to dominate the ancillary space in the US for quite some time. CV Sciences will benefit greatly from the passing of the Farm Bill of 2018 and iAnthus's merger with MPX will create one of the largest US MSO's and given them a strong brand in the market (Melting Point Extracts).
Below are our high-level analysis of some of the Q3 earnings reports.
The "Apple Stores" of the cannabis industry show only moderate revenue growth. Delivery revenue of $21.5 million, which was only up 4.4% on last quarter, this moderate growth was compounded by their net loss fo $66 million for the quarter. This on the back of a $79 million loss in the previous quarter, has us asking if their current management team has the ability to properly and effectively manage tier cash flows.
They have been on a spending spree in 2018, with their purchase of Pharma Cann being the highlight of the year (we have added $6.2 million to there toppling revenue for this pending acquisition). We applaud them on their aggressive retail strategy and growth plans but question their ability to continue burning cash at such a pace. We are still very bullish on MedMen and give them leeway on this, given the current land grab mentality happening across the US
With Q3 revenues of $1.1 million, this was a substantial increase over their previous quarter's $533k. They have displayed prudent financing and cash management and their acquisition of MPX is game-changing in our view. This brings them serious revenue and solid in market brands.
The combined entity would have coverage across Massachusetts, Florida, Vermont, NY, Arizona, Nevada, and California, and with MPX delivering CAD$14.7 million in Q3, the combined entity would be one of the highest revenue producers in the market.
We are very bullish on iAnthus for 2019. They have a solid management team, a great track record of prudent execution and cash flow management, and with MPX look set to really stake their claim in the recreational market.
We recently wrote about Charlotte's Web in our Top 3 Hemp Stocks for 2019. Although they delivered a pretty average Q3, there is no doubt they remain one of the big opportunities for investors looking for gains in 2019.
Q3 saw CWEB deliver $17.7 million in revenue and minor increase on the $17.2 million delivered in Q2. According to the company, this was as a result of new product packaging being rolled out across their brands. The upside to this is that they now have significant inventory on hand, to meet the rising demand for CBD-infused products in the booming US market.
They are without a doubt the market leaders, and with a solid balance sheet, good profitability ($13.8 million [80.2% margin]) and one for the best distribution networks (currently supplying over 2,700 retailers), they are in prime position to take advantage of the newly opened hemp-derived CBD market.
This is one stock we are very bullish on for 2019.
Green Thumb Industries
Green Thumb produced revenue of $7.2 million in Q3, an increase of 344% over the previous year. This was achieved both through organic growth, and an aggressive acquisition spree. Although they posted positive EBITDA of $3.4 million, their bottom line Net Income was -$3.3 million.
Organic growth came through increased revenue in their chain of RISE dispensaries, with new growth in markets in Ohio and Florida. In Nevada, they bought Internal Associates and in Florida, they purchased one of 14 licenses allowing them to have up to 30 dispensaries in the State. They have already secured 9 leases in this regard.
In New York, they acquired one of ten licenses to produce medicinal cannabis and a cultivation facility; and finally, in Ohio, they secured the leases for five new dispensaries that will open in 2019.
This is one of the best MSO's in our opinion, and we see great upside and potential for GTI in 2019.
Origin House (formerly CannaRoyalty)
One of the best performers of 2018, CannaRoyalty underwent an entire corporate change in there rebrand to Origin House. This rebrand was a visual representation of the strategic change they undertook to move from passive financial investors in cannabis-centric businesses, to actually owning and operating the assets.
One fo the few stocks that performed during the bloodshed of the latter months of 2018, they delivered solid revenue in Q3 of $6.6 million (up significantly from $3.5 million in Q2). These numbers are even more impressive when you consider they do not include two of Origin's biggest acquisitions.
RVR distribution, which is the dominant distribution player int he California market, was only officially acquired in October, and 180 Smoke, a leading Canadian Vape retail chain with 20 stores and over CAD$11 million in annualised sales.
Origin House has a solid balance sheet, with over $75 million in cash, and with their premium brand FloraCal, starting to gain serious traction in the California market, we see them as one of the best ways to play the California market in 2019. Watch this space.
Let's close out the individual review of the Q3 Earnings season, with the best possible "pick and shovel" play in the current cannabis market. KushCo Holdings (formerly Kush Bottles) operates a number of different divisions. The bulk of their revenue is generated via their Vape Products division (albeit with lower margins) and is closely followed by their packaging channel (where is all began).
They have also recently expanded via their new 'energy" division, supplying the CO2 cylinders to extraction companies utilising CO2 technology to extract oils from cannabis stems and plants. This is one of the fastest growing areas of the industry and one that we think should deliver great value to Kush in the coming year.
In Q4 (ending August 31), they delivered revenue of $19.9 million (with Full Year 2018 revenue of $52 million). Kush operates mostly in the recreationally legal States, and their primary market is the small growers and the dispensary chains and outlets. Currently operating in 9 States, California is where most of their revenue is generated.
The only issue we have with KushCo is the fact that they are still cash flow negative and would like to see this change in 2019. In their defense though, is the fact that they have spent significantly to develop localised "hubs" across the US to facilitate faster and more economical delivery. They have also established offices in China to be closer to their suppliers.
Although investors should not expect to see the same level of growth in KushCo that some of the MSO's will see, they are extremely well positioned for growth, particularly as more US States legalise for recreational use (as Michigan did in November and as New York is likely to do by June).
The Bottom Line
We are super confident that the US will continue to open up and that the companies operating in the US will continue to show significant revenue growth. With ore States expected to legalise for either medicinal or recreational use this year, we expect the market size to continue to grow and develop.
However, whilst it remains federally illegal, the growth will continue to be both fragmented and State by State, eliminating the opportunities for economies of scale, and ultimately impeding the path to profitability.
Having said that, as companies continue to ramp up and scale, we expect to see quite a few of them move into profitability this year. The passing of the Farm Bill of 2018 has completely changed the game, and as a result, we expect to see the hemp companies experience hyperbolic growth this year, as the market opens up and CBD becomes more mainstream.
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