CURLF - Forward Estimates Fall Sharply For Curaleaf

2023-05-07 05:23:22 ET

Summary

• Curaleaf reported its Q4 financials recently in line with expectations.
• Analysts slashed revenue and earnings projections.
• I think that Curaleaf, down a lot in 2023, could rally just a bit, but there are plenty of better ideas.

I discussed the poor performance of Curaleaf ( CURLF ) a couple of weeks ago ahead of their delayed Q4 report , which was in line with expectations. The stock has been hammered this year, but it still looks expensive relative to peers. I called it out in January, writing that it was cheap but with better alternatives for investors. Two weeks ago, I discussed that I wasn't yet bullish despite the big plunge. Today, I want to share my forward analysis again and explain why it's not yet a relatively good buy.

The Q4 report

Curaleaf had guided to revenue of $352 million, and analysts had been expecting $354 million. The company converted from IFRS accounting to GAAP accounting, and it reported revenue of $352.5 million, up 4% from Q3 and 14% from a year earlier. The revenue was nearly 79% retail revenue, up from 73% a year ago. Wholesale revenue fell 10% during the quarter from a year ago. Adjusted EBITDA was $73.2 million, down 4% sequentially but up 16% from a year ago.

For the full year, revenue increased 12% to $1.34 billion with adjusted EBITDA gaining 17% to $305.4 million, a margin of 22.9%. The company reported goodwill impairments and inventory write-downs of $225 million.

The balance sheet ended with cash of $163 million at year-end and debt of $623 million. During the year, the company generated $46.4 million from its operations, and it spend $138.4 million on capital expenditures.

The estimates change

Ahead of the Q4 report, analysts projected 2023 would see revenue of $1.504 billion, up 12%, with adjusted EBITDA growing 22% to $402 million. Now, they project revenue will grow 5% to $1.397 billion with adjusted EBITDA at a much lower $340 million. This 15% drop is huge! The projected margin has fallen from 26.7% to 24.3%.

Similarly, the 2024 expectations dropped sharply. Before the report, analysts were looking for revenue of $1.6 billion and adjusted EBITDA of $448 million. Now, they forecast revenue will grow 7% to $1.497 billion with adjusted EBITDA at $388 million, a margin of 25.9%.

The stock rallies

Despite the big reduction in estimates, the stock rallied sharply:

Last week, the stock rallied 9.4%, but it's still down almost 35% year-to-date.

My outlook

Before the report, I shared a year-end target of $3.81 based on achieving an enterprise valuation to projected 2024 adjusted EBITDA of 7X. Using the current estimate and the same multiple, I get $3.13 (lower projection and worse net debt). This target is only 12% above the price at the close on May 5th.

Currently, Curaleaf is the most expensive of the five largest MSOs as measured by enterprise value to projected 2024 adjusted EBITDA:

While Curaleaf could do better than I expect, I think other stocks will do so as well, especially Trulieve ( TCNNF ), which I discussed in late February as a timely buy . That stock has fallen over the past two months to an all-time low. Again, I remain highly concerned that the AdvisorShares Pure US Cannabis ETF ( MSOS ) invests 16.6% of its portfolio in the name.

Conclusion

The cannabis sector is dominated by retail investors, most of which don't closely follow the analyst estimates. Despite a sharply lower outlook than before the report, the stock has rallied. I believe that the low price and the excitement about the SAFE Banking bill being introduced in both houses of Congress, which I think is a mistake, teamed up to cause this spike. While I find Curaleaf to be likely to rally over the balance of the year, it's not attractive relative to peers in my view.

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