Get Ready for Better Numbers from Cannabis Operators

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Friends,

This was an extremely tough week for investors and operators in the Canadian cannabis sector. We all knew that the roll out of legalization in Canada is highly flawed given the lack of retail distribution, but the full extent of the weakness was finally revealed, with the largest of the licensed producers (LPs) revealing abysmal numbers for the most part. While Tilray and Sundial were able to grow sequentially, Aurora Cannabis, Canopy Growth and Supreme Cannabis suffered double-digit percentage declines in the September quarter compared to the June quarter, with Organigram also pre-announcing a large decline sequentially from its Q3 to its Q4.

The narrative is consistent across all of the LPs: The number of stores in Ontario is insufficient. The province has a population of almost 15 million, yet there are fewer than three dozen stores. In Toronto, the largest city, there are only 10 stores open at this time in the entire metropolitan area. Contrast that with Chicago, a city similar in size, which had a lottery on Friday in advance of Illinois legalizing. The stores won’t all be open on day 1, as the winners need to secure locations, but the city has awarded 31 dispensary permits. Unlike Ontario, which had minimal qualifications required to enter its lottery,  all of the Chicago lottery participants were already operating medical dispensaries and will hit the ground running. Additionally, the city expects to double the number of stores quickly.

While this past week saw selling across the sector due to the disappointing results from the LPs, which continue to struggle with profitability as well, the coming week is likely to change the tone as the reporting shifts to American multi-state operators (MSOs). We will see results from the three largest MSOs in terms of revenue, and it’s likely that the very positive trends from the first half of the year persist.

Trulieve is expected to generate Q3 revenue of $66 million, which would represent sequential growth of 14%. The company has exceeded expectations in each of the four prior quarters, its entire history as a public company, and it is generating huge profits from its Florida operations. Curaleaf could surpass Trulieve, as it is expected to generate $66.5 million in revenue, growth of 37% over Q2. Though, it has missed estimates in the past two quarters. Finally, Green Thumb Industries is expected to grow 37% from Q2 to $61.2 million. It has exceeded the consensus in the past three quarters. Perhaps investors will take notice that the revenue from these companies, if they are anywhere close to the expectations, will exceed those of largest Canadian LPs.

Investors are just beginning to pick up on the divergence in near-term prospects between the MSOs and large LPs. The chart below compares the three largest MSOs in terms of revenue with the largest LPs as measured by the Canadian Cannabis LP Tier 1 Index (in blue) over the past six months:

Until late August, the large LPs were tracking with the large MSOs, but, since then, there has been a divergence, which became more extreme last week as each of the large MSOs increased while the LPs sold off sharply.

Cannabis investors want to see growth, and the Canadian LPs aren’t yet delivering results that inspire investors. We think that will change in the next couple of quarters as fundamentals improve in Canada in Q1 with the advent of new products and better retail distribution. Fortunately, investors will likely be excited in the near-term as the MSOs produce the kind of near-term growth they seek.


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Sincerely,
Alan & Joel

Exclusive article by Alan Brochstein, CFA
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. 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. Contact Alan: Twitter | Facebook | LinkedIn | Email

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