LONG-TERM MARGIN STRUCTURE?
When you understand that there are forces beyond fundamentals driving Canadian LP stock prices, you can make a lot of money on the long side. We took CGC off the Best Idealist on Monday ahead of the earnings, believing that the stock up 64% in 4Q20 and another 63% in January more reflects its potential move into the US, while fundamentals are still lagging. The message coming from CGC this quarter is that it's going to be hard for anybody to make money selling cannabis in Canada. To that end, why is TLRY up 412% so far in 2021 and APHA up 240%? The forces driving these stock prices have the makings of a GME short squeeze. The long term margin guidance the company put out yesterday was anything but stellar and looks more like a marginally profitable CPG company. Look at the gross margin cadence management guided too. They expect Q4 gross margins to be in the high 20s, with further improvement during FY '22 with a full-year FY '22 gross margin of approximately 40%. To put that in perspective, best in class US MSO, TCNNF has a Gross Margin in the Mid '70s! Given the company's high-cost structure, they can only convert that to an adjusted EBITDA margin in the second half of FY '22 of 20%. The average of the 4 largest US MSO is putting up EBITDA margins of 35%. Currently, CGC is trading at 20.3x and 164.8x FY22 sales and EBITDA, respectively. The Reddit crowd can justify buying this stock today; we, on the other hand, cant play that game and will wait for a pullback.
Marijuana legalization remains popular.
A poll conducted by Emerson College found that legalizing marijuana is more popular than many other legislative initiatives, as seen in the following table. 61% of respondents said they think legalizing recreational cannabis is a good idea. The next most popular of the national policy proposals is rejoining the Paris climate accord, which was 57% in favor. Of the respondents identifying as Democrats, 74% favor marijuana legalization compared to 46% identifying as Republicans and 60% of independents. Support for legalization decreased with age. The only group that was not in favor was those over 65 years old compared to 79% of those between 18 and 29, 67% of those between 30 and 44, and 57% of those between 46 and 64. The survey’s findings were similar to a Gallup poll published in November in which 68% of respondents said they were in favor of legalization.
N.Y. REC SALES COULD TOP $500 MILLION IN FIRST YEAR
Gov. Andrew Cuomo’s budget proposal to legalize adult-use marijuana in New York could bring in an estimated $566 million in legal market sales in the first full fiscal year of implementation and up to $2.6 billion by FY 2027, according to the Center for New York City Affairs at The New School. Estimates that under the governor’s proposal, recreational marijuana state excise and sales tax revenue would hit $159 million in FY 2023, rising to $765 million in FY 2027. It further projects that it would generate nearly 51,000 jobs and $2.2 billion in employee compensation and add $6 billion in economic output by FY 2027. “A legalized adult-use cannabis industry can inject billions into our state economy and address longstanding inequities with smart policies in place. As New York works to develop new revenue streams to address critical budget needs and repair the economy in the wake of the COVID-19 crisis, legalization provides a substantial opportunity to create new and diverse small businesses, quality jobs and strengthen rural and urban economies and communities.” State Budget Director Robert Mujica has said that the governor’s proposal is estimated to generate around $300 million in tax revenue per year when fully operational. Still, it will likely “take several years to get up to those numbers.”
