CRON - Curaleaf Is A Sell After The Rally

2023-07-09 04:40:06 ET

Summary

• I have followed Curaleaf closely since it went public in late 2018.
• This is my fourth article of the year on the company, the largest MSO by market cap or by revenue.
• The stock, which has rallied 64% since my April reevaluation, should be sold in favor of more attractive stocks.

Curaleaf Holdings ( OTCPK:CURLF ) rallied 29% last week to $4.00, but it is still down 6.9% in 2023. While the overall stock market is up so far this year, cannabis stocks, as measured by the New Cannabis Ventures Global Cannabis Stock Index, have declined 18.0%. The bear market that began in February 2021 remains in force, with prices down over 91% since the peak.

I wrote about Curaleaf in January, it was also at $4.00. I said that the stock was cheap, but there were better alternatives . Since then, the very largest MSOs have been mixed:

On average, the 5 largest MSOs have declined since January 13th by %. Trulieve ( OTCQX:TCNNF ), which I find very attractive still despite its recent jump, is down 32.8%, while Verano Holdings ( OTCQX:VRNOF ) has rallied 9.0%.

In mid-April, when I reviewed Curaleaf, it had declined greatly to $2.44 and wasn't lifting yet. I said then that I liked it much more due to the lower price, but that the valuation relative to other large MSOs was unattractive . I shared a target then of $3.81 at year-end based on achieving 2X projected 2024 revenue for its enterprise value. This worked out to 7X enterprise value to projected adjusted EBITDA. Since then, the estimates have declined.

A Look at Q1

With three acquisitions completed, the revenue growth from a year ago of 14% wasn't that impressive. The $336.5 million was down 4.5% from $352.5 million in Q4 and a little ahead of the expected $333 million. Adjusted EBITDA had been expected to be $73 million, and the company hit that estimate. The adjusted EBITDA fell 4% from a year ago and 5% sequentially.

Wholesale revenue fell for Curaleaf by 11% from a year earlier during Q1 and represented 18.5% of overall sales. Retail revenue expanded 21%. Excluded from the Q1 report was the operations in California, Colorado and Oregon due to them being discontinued operations. The revenue for those three states was $7.4 million in Q1, down 49% from a year ago.

The Analyst Outlook

Analysts currently project Curaleaf 2023 revenue will increase 2.5% to $1.37 billion with adjusted EBITDA growing 7.5% to $328 million. For 2024, they expect revenue will grow 7.6% to $1.47 billion. Adjusted EBITDA is projected to grow 18% to $387 million. That's a margin of 26.3%.

In April, after Q1 had ended but ahead of the company reporting it, the estimates were higher. Analysts were looking for revenue of $1.5 billion and adjusted EBITDA of $402 million in 2023 and $1.6 billion and $448 million in 2024.

The current 2024 adjusted EBITDA forecast is 13.6% lower than it was in mid-April. My third article on Curaleaf in early May discussed the falling estimates ahead of its Q1 report.

Valuation

The stock is trading above my prior year-end target by 5%. It looks expensive relative to peers:

The valuation seems high outright given the low growth the company is experiencing and expected to experience. 8.7X 2024 projected adjusted EBITDA is much higher than the other peers. Also, the stock has a -$592 million tangible book value.

When I last looked at Curaleaf here in April, my $3.81 target worked out to be 7X enterprise value to projected 2024 adjusted EBITDA. I continue to use that multiple, and multiplying 7 by the projected adjusted EBITDA of $387 million is $2.71 billion. The market cap of Curaleaf is currently higher at $2.89 billion. Taking the $2.71 million enterprise value that I project and subtracting the net debt of $478 million yields a target market cap of $2.23 billion. Based on their shares outstanding currently, this works out to $3.09. This is 19% lower than my prior target in April and slightly lower than my target in May, and it is 23% lower than the current price.

If I were to adjust my ratio higher, it would still be expensive. Using 10X, the target would be $4.70. While this would provide a return of 17.5% at the higher valuation instead of a loss, I think that investors would do much better in its peers, especially smaller names like Planet 13 Holdings ( OTCQX:PLNHF ). Two weeks ago, I shared my $1.08 year-end target , which is 89% higher than its current price. That is a debt-free company that has a price-to-tangible-book-value ratio of just 1.1X. My target there is based on 10X enterprise value to projected adjusted EBITDA in 2024.

Chart

Looking at the chart over the past year, the stock is down substantially still from its peak near $8 in December. It is also up over 70% from the low close in April:

I note that the volume hasn't been very high. I see resistance perhaps here, but perhaps as high as $5. The middle resistance level of $4.50 was support in late 2022 and then resistance in early 2023.

A pullback could test a range of $2.35-$3.20. Given my year-end target of $3.09, a move into the 2s would not surprise me.

Conclusion

Down only 7% in 2023 and relatively expensive to its peers, Curaleaf isn't attractive to me. The company is rumored to be looking at buying Cronos Group ( CRON ) or its Canadian operations, but I don't see this as a driver of the stock. I believe that the price could decline, but perhaps the cheap cannabis sector will do better. If so, I expect Curaleaf to lag its peers.

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