A marijuana growth stock to buy

Curaleaf is one of the largest vertically-integrated cannabis companies in the US. Organic vertical integration is a key strategy.


Haywood Securities analyst Neal Gilmer continues to favour the US cannabis market.

Curaleaf Holdings Inc. (CNSX—CURA) reports record numbers (not uncommon for fledgling marijuana stocks) with double-digit growth on sales figures, and triple-digit growth on its earnings.

Toronto-based Haywood Securities analyst Neal Gilmer points to organic growth in Florida, Massachusetts and New Jersey as the main driver of its recent outperformance. He maintains a “buy” recommendation and $12.75 per-share target price.

Curaleaf is focused on broadening its presence in its existing markets while also entering new markets and leveraging its strong brand awareness. Recent acquisitions in California bring its branded retail presence to its largest state, Nevada, to materially scale up production. The Cura Partners Inc. acquisition will complement its strong retail platform with the leading wholesaler across four West Coast states, the analyst states.

Aims to control its entire supply chain

In addition, the company’s acquisition of Grassroots will expand Curaleaf’s footprint across the American Midwest further solidifying an operational footprint across the United States. A key component of Curaleaf’s business plan is achieving vertical integration in the markets in which it operates and where it is permissible.

In doing so, the company is able to control its entire supply chain, which not only ensures consistency and quality of product, but also captures margin throughout the value chain, leading to strong profitability in those markets, Mr. Gilmer explains.

“We continue to favour the US cannabis market and believe that Curaleaf’s third-quarter 2019 results underscore the growth opportunity for the company,” the analyst says, “despite the overall headwinds in the sector.”

Revenue, EBITDA rising

Curaleaf reported managed revenue of $73.2 million and total revenue of $61.8 million, a quarter-over-quarter increase of 33 per cent and 27 per cent, respectively. Managed revenue was better than consensus of $68.7 million but was below Mr. Gilmer’s admittedly “overly aggressive” estimate for managed revenue of $84.5 million.

Gross margin on cannabis sales rose seven per cent quarter-over-quarter to 47 per cent. The company reported its second quarter of positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) at $9 million, better than consensus estimates of $5.4 million (but also below the analyst’s aggressive estimate of $12 million).

Curaleaf’s adjusted EBITDA margin increased to 15 per cent, in-line with the analyst’s expectations. Pro forma revenue (as if all pending transactions were closed as of Jan. 1, 2020) for the quarter was $129 million, up 33 per cent quarter-over-quarter. The company finished the quarter with a cash balance of $91.2 million and $106 million in debt.

On a call with Mr. Gilmer, management reiterated their 2020 guidance for pro forma managed revenue of $1-to-1.2 billion based on all announced acquisitions and based on the closing of those acquisitions as of Jan. 1, 2020. The company also indicated anticipated EBITDA margins of 30 per cent or greater.

Curaleaf has 51 operating dispensaries. Once the pending acquisitions close, Curaleaf will have licenses to open up to 131 dispensaries expanding its presence to 19 states.

This is an edited version of an article that was originally published for subscribers in the December 20, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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