President Joe Biden’s recent directive to review the classification of marijuana in the United States has sent ripples through both the cannabis industry and Capitol Hill. Historically, cannabis policy has been associated with left-wing causes, often met with strong opposition from Republicans. However, in what Bloomberg describes as a “rare moment of progress,” the notion of rescheduling marijuana is gaining traction from both sides of the political spectrum. This newfound optimism is fueling interest and enthusiasm in cannabis stocks.
As the industry awaits updates on potential rescheduling, investors are closely monitoring the cannabis sector, and one notable development is the remarkable surge in shares of Canada-based Canopy Growth (TSX: WEED), which have risen by almost 200% since late August. However, despite these gains, Canadian cannabis producers continue to face substantial challenges. Over the last four fiscal years, Canopy Growth has reported cumulative operating losses of nearly $3 billion, causing its share prices to plummet by 98% from all-time highs.
Amid this shifting landscape, two companies poised to benefit significantly from potential rescheduling are Green Thumb Industries (GTBIF) and Curaleaf Holdings (CURLF).
Green Thumb Industries (GTBIF)
In contrast to their Canadian counterparts grappling with various issues, multi-state operators like Green Thumb are fortifying their profit margins and positioning themselves to capitalize on economies of scale, particularly if marijuana legalization gathers momentum.
Green Thumb, with a market capitalization of $3.5 billion, strategically focuses on limited-license markets in the U.S., where competition is constrained to a select few. This strategy has enabled Green Thumb to cultivate a dedicated customer base and consistently achieve positive GAAP results for 11 consecutive quarters, setting it apart from other players in the cannabis industry. During the second quarter (Q2), Green Thumb reported sales of US$252 million, a GAAP net income of US$13 million, and an adjusted EBITDA of US$76 million, demonstrating a robust 30% margin. The company’s strong operating cash flow of US$93 million and cash reserves of US$149 million at the end of Q2 underscore its financial stability. With plans to expand its Rise retail stores, Green Thumb is projected to achieve an 18% increase in sales, reaching $1.36 billion in 2023, and a 16.3% rise in revenue to $1.6 billion in 2024. Analysts anticipate adjusted earnings to grow from $0.44 per share in 2022 to $0.57 per share in 2024, despite macroeconomic challenges. With a price-to-forward-sales ratio of 2.2 and a price-to-forward-earnings ratio of 25.6, GTBIF stock presents an enticing valuation, trading at a substantial discount to consensus price target estimates.
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Curaleaf Holdings (CURLF)
If marijuana receives reclassification as Schedule III, it could usher in a new era for medical cannabis, aligning it with pharmaceutical regulations. This transformation would be particularly advantageous for companies like Green Thumb and Curaleaf, both of which operate in this space.
Curaleaf, boasting a market cap of $4.8 billion, has experienced a remarkable 64% surge since late August. Much like Green Thumb, Curaleaf operates as a multi-state operator, with a presence in 20 states. The company manages 22 cultivation sites and 152 retail outlets, positioning itself for international expansion through strategic acquisitions. For instance, in the fourth quarter of 2022, Curaleaf secured a 55% equity stake in Four 20 Pharma, a leading medical cannabis company in Germany. With annual sales in Europe estimated at US$248 billion, Curaleaf is well-positioned to drive sales growth over the next decade, especially given its 2022 revenue of $1.77 billion. If rescheduling moves forward, Curaleaf could see its stock sustainably surpass the $5 mark, firmly establishing itself among the top cannabis stocks.
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