What is the Marijuana Scorecard?

The marijuana scorecard is a tool investors can use to judge which U.S. marijuana companies are best and worst positioned for the rapidly legalizing American market.

The scorecard is the most comprehensive free marijuana investment resource available, full of important charts and metrics on revenue growth, valuation, liquidity, share issuance, assets, and much more.

The scorecard focuses exclusively on vertically integrated U.S. operators. We exclude biotech research-driven stocks and smaller growers with market caps below C$200 million and limited liquidity.

We also have a scorecard focused on Canadian growers which is also updated quarterly.

 

REVENUE GROWTH ABOVE ALL

U.S. Marijuana companies trade at a premium price to sales multiple, one that can only be justified by stock market-leading revenue growth.

So far these companies are growing revenue 100%-300% a year, justifying their valuations.

The chart below looks at who is growing the fastest based on estimated revenue in 2019 compared to pro-forma 2018 results.

Revenue growth is only one piece of the puzzle, but right now the market is giving better valuations to the companies that can grow the fastest.

Pro-forma revenue explained:  Company A generated $100 of revenue in 2018, but in early 2019 they buy a company that had $20 of revenue in 2018. Pro-forma 2018 revenue is $120. This method shows us a company’s ability to grow organically instead of just from buying other companies

2019 Estimated Revenue Growth

Source: Grizzle Estimates, SEDAR

DILUTION – A FINANCIER’S BEST FRIEND?

Dilution is when a company issues more shares to raise money.

Management teams love issuing shares because they cost nothing to create, are more abundant than cold hard cash and unlike debt, don’t need to be paid back in the future.

Though the cost of share issuance may be effectively invisible on a cash basis, the cost is very real to us investors.

Dilution explained: Company A generates $100 in earnings and has 100 shares outstanding. As an owner of 1 share you are entitled to $1 of the company’s earnings. Now say company A issues 100 more shares, or 200 total. Now as an owner of 1 share you are only entitled to $0.50 of earnings or 50% less. Dilution makes each share of stock less valuable.  

U.S. cannabis companies have been issuing shares like mad to pay for growth but this growth has come at the expense of a ballooning number of shares.

Ignoring profitability, which is still very uncertain, as long as these companies can keep growing revenue faster than the share count, investors are still better off even if the share issuance causes a short-term dip in the stock price.

In the first public analysis of its kind, we analyzed whether industry revenue growth as a whole is keeping up with the growth in shares.

Positively for investors, all but 1 of the top 19 U.S. companies are growing revenue faster than the share count, meaning all this dilution has been worth it so far from a revenue perspective.

TILT leads the pack due to some large acquisitions, but the company almost went bust paying for these deals even while doubling the share count.

Acreage looks great as well though we think this is because the company had a large cash balance to use on acquisitions instead of having to pay with shares. As the cash runs low the company could double shares outstanding to pay for dispensary construction and additional deals, bringing revenue per share growth back in line with peers.

On the bottom end was Dixi Brands. Dixi has not issued any new shares since going public in November, but revenue is down 9% in the latest quarter compared to the quarter when the company went public.

Revenue per share growth is good, but the real test is when it comes time for these companies to convert all this revenue into earnings. Earnings will ultimately determine who comes out on top in the race to dominate the U.S. cannabis market.

Growth in Revenue Per Share

Source: Grizzle Estimates, SEDAR

 

CompanyGrowth in Rev/ShYears Public
TILT5277%0.6
ACRG.U607%0.9
LHS424%2.0
VREO197%0.4
CL190%0.7
HARV187%0.7
IAN133%2.9
GGB98%0.7
CURA68%0.8
TRUL59%0.9
KSHB33%3.6
ELLXF27%1.6
PLUS21%0.8
GTII17%1.1
CVSI16%6.6
MMEN15%1.2
PLTH10%1.1
CWEB6%0.9
DIXI.U-13%0.7

 

Footprint

Another important factor to consider is the U.S. operators’ state footprint.

Company management argues that with limited licenses granted in all medically legal states, there are excess profits to be generated before cannabis is legalized countrywide.

They also believe that being an early entrant into a state lets you establish brand recognition, translating into a higher market share as the number of users and sales revenue expands with legalization.

If you believe these two arguments then the more states and the more retail locations the better.

The market is rewarding the larger operators with higher valuations and more funding currently, but with new entrants popping up targeting the technology and logistics sides of the business as well, the footprint may not be the only determinant of success.

We only count a state if the company has operating assets there. Selling your product or services to a dispensary in a state where you don’t have assets doesn’t count.

Operational Footprint (# of States)

Source: Grizzle Estimates, Company Filings and Presentations

CASH IS KING: YEARS OF CASH LEFT

Investors often forget the importance of cash when they are investing in a high-growth industry.

Even though multi-state operators are seeing rapid revenue growth, all but one of them is not yet profitable and they still are spending millions to grow sales and expand their state footprints. Cash is king.

The chart below looks at each company’s cash balance including all capital raises up to the end of July compared to the cash burn from operations, plus spending on construction of new greenhouses.

We exclude cash spent on investments because these can be cut back if the company faces a cash crunch.

Cannabis stocks have continually raised more money from the market so use this chart as an indication of who will be issuing more stock or debt, not necessarily an indicator of who may go bankrupt.

Most of these companies currently have plans to burn through their cash balance in less than 24 months.

*CXXI current cash is not enough to pay back a $14 million loan that is currently due and payable. The loan has been restructured and now requires $800,000 a month of principal growing to $2 million by December. Realistically we estimate the current cash balance of $2.3 million would last another 2-3 months.

Years of Cash Left at Current Burn Rate

Source: SEDAR, Grizzle Estimates

JUDGING THE RISK OF ASSET WRITEDOWNS

Cannabis stocks have spent billions on acquisitions in the past two years. As usual, acquisitions in fast-growing and potentially over-hyped sectors lead to large amounts of goodwill.

Goodwill is created when company A pays $200 for company B yet company B only owns assets worth $50 on the balance sheet. The additional $150 becomes goodwill on company A’s balance sheet.

The simple way to think about goodwill is the more of it a company has, the higher the risk of a write-off down the road.

Not all goodwill is bad, but goodwill does require growth in cashflows to avoid a costly write-off down the road.

The company’s auditor values the goodwill using a forecast of cashflows. If the future cashflow is not enough the auditor will make management write off some of the goodwill. A goodwill writeoff makes earnings look worse and demonstrates the management is not investing shareholder money wisely.

The cannabis companies doing the most deals have the most goodwill all else equal.

Goodwill as a % of Non-Cash Assets

Source: SEDAR

VALUATION

U.S. operators are so early in the build-out of their assets that traditional valuation measures are not very useful.

When companies are not yet profitable, price to sales is the most useful metric to compare one high growth company to another.

Price to Sales

All the companies are generating positive sales even if net income and EBITDA, a measure of cashflow, are negative.

Even though U.S. operators will argue otherwise, we think their business models are all very similar at this stage. Strict regulations make it hard for one company to operate any differently than the other. The only way to stand out is through revenue growth, footprint and/or profitability

Even though U.S. operators will argue otherwise, we think their business models are all very similar at this stage. Strict regulations make it hard for one company to operate any differently than the other.

We feel comfortable using top-line revenue to differentiate one company’s earnings power from the other at this early growth stage.

Without positive earnings to go off of, price to sales provides us with a reliable number comparing which companies are priced at a premium or a discount by the market.

U.S. operators trade at a juicy discount to Canadian growers due to the legal uncertainty in America. We think this presents an opportunity for investors who are willing to take on risk and have a multi-year time horizon.

U.S. cannabis stocks have regulatory upside as well as operational upside, a potentially powerful combination.

2019 Price to Sales by Operator (As of 8/2/2019)

Source: Grizzle Estimates, SEDAR

Below is the fully diluted share count for U.S cannabis stocks.

This metric is most useful to see who may have the most shares held by insiders looking for an exit.

Shares have been the currency of choice to pay for acquisitions, meaning there are many entrepreneurs out there who sold their business to a Medmen or Curaleaf and now hold stock of these companies.

These entrepreneurs were trying to cash out so they are unlikely to hold this stock long term and instead want to convert it to cash sooner than later.

This selling could put some pressure on stock prices over the next 12 months but as these companies begin to grow organically, insider selling will eventually have little direct impact.

Fully Diluted Share Count

Source: Grizzle Estimates, SEDAR

Bottom Line

Hopefully, this scorecard provides you with some useful data so you can make more informed choices about which U.S. operator is worth a potential investment.

All of these companies have an exciting story to tell, but the decisions they are making today about growth in their share count, asset footprint and revenue will determine if their share price is going up, down, or sideways over the next few years.

The most important thing you can do as an investor is to separate the exciting stories and hype from the actual financial results.

The marijuana scorecard should help you do just that.

Fully Diluted Market Capitalization (As of 8/2/2019)

Source: Grizzle Estimates, SEDAR