Guest post from Adam Grossman, Portfolio Analyst at Phyto Partners
The Canadian people have spoken, and they chose Justin Trudeau and his Liberal party to run the country. Cannabis industry friend Trudeau has made it abundantly clear that he will fully legalize adult use of cannabis. As that occurs, the long struggling marijuana industry in Canada will get a huge bump in attention and demand. Here are some of the catalysts that will make a big difference in the business of marijuana for Canada’s struggling MMPR licensed producers:
- The government allows you to deduct cannabis as a medical expense for tax purposes
- Insurance companies are beginning to cover the medicine
- The quality is superior to many, if not all American companies and the selling price is ~$7.50 CAD per gram in Canada
- Justin Trudeau and his liberal party just won the election and has openly stated that the first order of business is to fully legalize marijuana.
- Consolidation is taking place and there will only be 5-10 producers
- As a patient you’re only allowed to sign up with one producer but if that producer is a holding company then you have access to multiple producers… If you sign up with Canopy Growth Corporation then you can get medicine from Tweed, Tweed Farms, and Bedrocan (if you’re a one off producer it will be hard to gain patients when some companies offer an umbrella of brands underneath them, this will only FORCE consolidation)
- Tweed has an exclusive partnership with DNA Genetics the leading seed engineers who have won numerous awards
- Edibles just became legal, the producers were forced to discard their excess product now they can generate revenue from a previous expense to the business and on top of that the margins are high on oils (Canopy Growth Corporation purchased a Waters extraction machine)
- As producers innovate and create edibles, topicals, pills, etc this will only further the number of doctors who will recommend cannabis (7% of doctors prescribe cannabis and that number is growing substantially)
- Amazon business model where the patients don’t go to dispensaries to purchase their medicine, they go online and the producer directly ships the product to your door
- Canopy Growth Corporation is conducting the largest study on medicinal cannabis with 6,000 patients enrolled (doctors will advise patients to choose medically focused producers)
There are 26 licensed producers but some producers own a few licenses so there are truly only 22 companies for the entire market. There are 35 million people in the country, and Canada has among the highest cannabis consumption per capita.
The government projects that there will be 450,000 patients by 2024 and many of the producers think that the number is closer to 800,000 – 1,000,000 patients. The market is growing at ~10% compounded monthly.
Canopy Growth Corporation has ~25% of the Canadian market and their market share is only growing because of the reasons listed above (1 producer but patients can select many brands, ample supply, pharmaceutical approach, among other things). They are projected to have ~10,000 – 11,000 patients by year end or early 2016.
Back of the envelope math shows:
- Patients on average consume 1 gram a day for medical patients
- 365 grams of annual medicine
- Revenue per patient = $2,737.50 (365 days * $7.50 a gram)
- Annual Revenue = $27,375,000 ($2,737.50 rev per patient * 10,000 patients)
- Gross Margins = 70%
- Gross Profit = $19,162,500 ($27,375,000 * 70%)
- EBITDA Margin = 35%
- EBITDA = $9,581,250 ($27,375,000 * 35%)
- EBT = ~$8,500,000
- Taxes = 30%
- Tax Bill = $2,550,000 (30% Tax Rate * $8,500,000)
- Net Income = $5,950,000
- Shares Outstanding = 85,000,000
- EPS = $0.07 (5,950,000/85,000,000)
I like to use the PEG ratio (Price to Earnings to Growth) as opposed to P/E ratios for fast growing companies and a PEG under 1 is a very cheap stock to growth.
Example… If a stock has a P/E of 20 and their earnings are growing at 10% then the stock has a PEG ratio of 2 (20/10) and is considered relatively expensive.
Analyst are seeing 100%+ EPS Growth for at least 3 years. Analysts are projecting:
2017 –> $0.14 EPS
2018 –> $0.33 EPS
So, if we give Tweed a PEG ratio of 1 will be looking at a multiple at 100 times earnings but I will be even more conservative and give them a 0.5 PEG ratio which is a screaming buy and that would be a 50 P/E…
Based on today’s numbers you have a stock at 14 times 2017 numbers are growing top and bottom line 100+% for a few years… it is impossible to find another cannabis company valued so cheaply.
Tweed’s year end is March 31st, I’m using a straight calendar year for my projections (January 1st – December 31st), and I didn’t even account for patients coming on board during the year which is insanity but look at the numbers without even gaining 1 more patient.
Mettrum, the 2nd largest publicly traded producer adds 25 patients a day… Canopy probably does more but we’ll use 25 for conservative purposes, that would equate to 6,250 (25 new patients per day * 250 working days excluding holidays, weekends, etc) new patients added throughout next year. So Tweed should have ~16,500 patients by 12/31/16.
Price target 12/31/16 is $3.50 CAD ($2.30 CAD today)
Disclosure by author: Long Canopy Growth Corporation (the holding company of Tweed, Tweed Farms, Bedrocan, and MedCanAccess)
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