The Largest MSOs Offer Compelling Valuations

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The largest American cannabis operators ended 2020 with exceptionally strong performance in Q4. The New Cannabis Ventures Global Cannabis Stock Index increased 62% during the quarter, but the four largest multi-state operators (MSOs) by revenue all performed better:

So far in 2021, with the index up 24%, the largest MSOs have all lagged:

The largest MSOs have experienced a plethora of favorable news so far this year, including continuing strong top-line and bottom-line financial reports for Q4 and Q1, expanded access to capital, attractive M&A transactions and three states now legalizing in the East through the legislative process, which will enhance longer-term growth prospects. We find it odd that these stocks are slightly underperforming the benchmark, especially given their strong growth trajectories. In fact, it’s not just the largest MSOs, as the American Cannabis Operators Index has gained just 10.5% thus far in 2021.

One potential explanation is that the stocks were too expensive at year-end, which would suggest that the stocks needed some time to grow into their valuations. While we don’t think that is the case, even if so, the stocks now look extremely compelling from our perspective. The table below, based upon data from Sentieo, reflects the analyst consensus for each of the four largest MSOs by revenue:

We came into the year with the stocks trading typically about 20X projected 2021 EBITDA. Despite slightly higher prices, the current average, six months closer to year-end, is 19X, as the estimates have also increased. Note that all of these companies have a relatively small amount of debt that is offset for the most part by cash, so we are excluding debt and cash from the valuation calculations.

Over the next six months, assuming the estimates hold and the prices don’t change, the average large MSO multiple of one-year out projected EBITDA will be just 12X, which we view as incredibly cheap given the growth rates, even accounting for issues like the 280E taxation. There are puts and takes when looking at forward estimates, as the analysts can be overly optimistic. At the same time, the M&A environment has heated up, and given the recent prices for private assets, we would argue that there could be potential upside to estimates on a per-share basis.

In simple terms, the underlying fundamentals of the largest MSOs are racing ahead, while their stocks are plodding along. These largest MSOs and many smaller MSOs offer a great combination of strong balance sheets, torrid growth prospects and attractive valuations. We think that over the balance of year, MSOs could see their prices rise as investors begin paying closer attention to the 2022 outlook. In our view, now is the time to do so. Perhaps the unnamed institution that bought $50 million of GTI stock at $30 earlier this month is thinking about 2022 already as well.

With a mission to bring the benefits of cannabis to the world through science, art and exploration, The Valens Company has developed new products and advanced formulations to shape the future of the industry. Valens works closely with premier cannabis producers to extract, manufacture and test next-generation cannabis products. Recently, company has applied for listing its stock on the Nasdaq, shortly after announcing the company’s first acquisition in the U.S.

Get up to speed by visiting The Valens Company 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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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 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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