The Cannabis Landscape is Changing Fast
We are removing CRLBF and CCHWF from the Hedgeye LONG list.
The cannabis landscape is changing fast! Markey conditions are challenging with growth slowing, and price compression in many states looks to keep margins on the decline for many operators. The complexity of integrating two big companies and the setup for the stocks are poor. I understand the strategic importance of a national footprint, with 130 retail stores across an 18 market footprint. This makes the Pro-forma company's #2 retail footprint in the industry and the #1 retail footprint outside of Florida. The combined company will cover all 10 of BDSA's top-10 largest and fastest-growing markets by 2025, representing 55% of the US population and over 70% of the addressable cannabis market. Unfortunately, it will not be until 2025 until we see if this merger works.
Positives:
- Market share leader in critical states - the companies currently have #1 share positions in four markets (IL, PA, CO, VA), #2 share in MA,
- Future growth in (NY, NJ, and FL) bringing the combined company to a significant market position in seven of the top 10 markets by revenue in 2025 (according to BDSA)
- Exposure to the adult-use upside in VA, PA, OH, & MD.
- Proven Capabilities in Wholesale and Retail
- The $2.0B valuation is fully diluted.
Negatives:
- CRLBF reported abysmal 4Q21 numbers. 1H22 will not look much better
- The deal will not close for nine months, and integration will take another 6-12 months.
- Cresco's wholesales strategy was underperforming; part of the rationale for the deal was a more significant retail presence.
- CCHWF was a chronic underperformer
- Bloated balance sheet - asset sales are required in 5 states (IL, MA, OH, PA & NY) to pay down debt.
- Very hard to raise capital in today's market
- Exposure to CA and CO depress the multiple
PA Pricing Trends
The state's office of medical marijuana director says cannabis dispensaries are failing to pass along cost savings to patients.
Average wholesale dry-leaf cannabis dropped from $10.65 per gram in January 2021 to $6.65 per gram over the past month, Director John Collins said at a March 22 advisory board meeting. That's a 38% decrease. Meanwhile, average retail dry-leaf cannabis fell from $14.90 per gram to $13.40 over the same period — a decline of just 10%. Collins noted that the number of grower-processors and dispensaries has exploded during that same period. The number of medical cannabis users has also increased. Those are both factors that should lead retail prices to drop.
NJ REC IS A DISASTER
NJ legal weed sales on the verge of finally getting OK to begin - nj.com
The story in NJ.com says only "five alternative treatment centers currently serving medical cannabis patients that applied to expand to sell to the adult-use market are also expected to be approved." The state regulators have been complaining about enough supply and now only allow for five stores to open? There are eight publically traded MSOS with 19 licenses and 23 total active in the state.
You can't make this stuff up!
