Cannabis extraction services provider The Valens Company (CVE:VLNS, OTCMKTS: VLNCF) reported earnings that exceeded expectations

Revenue came in at C$30.6 million, 11% better than consensus of C$28 million and guidance of C$27-C$30 million.

Revenue was up 85% over last quarter, down only slightly from 87% growth the quarter before and 300% in the company’s first quarter with public filings.

Results benefitted from an increase in the white label business which creates assorted products for other producers who slap their brand on the “White Label”.

White label expertise is how Valen’s is going to differentiate itself and avoid commoditization of the extraction business longer term.

EBITDA of C$17.7 million crushed the analyst estimate of C$12 million.

The market will likely be happy with these results and the company’s stock outperformance against peers should continue.

Valens is starting to separate itself from the rest of the Canadian cannabis stocks with solid execution and the right market positioning. We are still nervous industry margins could fall faster than the market is expecting in 2020 so we recommend investors put their money elsewhere until early market growing pains are figured out. 

Valens has really started to separate from the other extractors with solid execution and a much smarter strategy given current industry dynamics.

Main competitor Medipharm Labs was impacted by a dispute with a customer earlier this year, which hammered the stock.

Performance of MediPharm and Valens (Last 6 Months)

Source: YCharts

Other producers are either struggling to ramp up quickly enough or are relying on the profitable but risky strategy of buying cannabis and selling extracts at the going market rate instead of through long term contracts.

Valens, in contrast, is signing long term contracts to extract the flower of others and also provide packaged products that other producers can buy and slap their own brand on.

Valens is saving producers time and the big upfront cash outlays required to extract flower in-house.

Financial distress in the Canadian cannabis space remains a risk for extraction company’s who generally rely on these same companies for all of their revenue.

An acute oversupply in the market will also filter down to extractors impacting their growth prospects and margins, which are far too high as a % of the revenue their customers make selling that same product.

Consensus P/S Multiples for Valens, Medipharm and Neptune

Source: S&P Capital IQ

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