MRMD - MariMed: Another MSO Overlooked

Summary

• MariMed is priced like the company is going out of business.
• The small MSO is building a corporate structure for up to $500 million in annual sales.
• The stock has a minimal market cap of only $250 million while revenues will top $150 million next year on the opening of new dispensaries.

The market likes to rush into the cannabis stocks trading on major stock exchanges on hopes of Federal legalization in the U.S., but the best plays are the small multi-state operators (MSOs). MariMed ( OTCQX:MRMD ) fits the bill for a small MSO with a nice growth trajectory. The company has the combination of a size easily consolidated by a Canadian cannabis player entering the U.S. market or a new CPG entrant into the space. My investment thesis remains Bullish on the small MSO.

Lots Of Opportunity

A couple of months ago, MariMed reported another disappointing guidance update for the year. The bull thesis was a business model set up for push from a $150 million run rate to annualized revenues of $350 million to $500 million.

Over the last year, the small MSO felt the same struggles as the peer group due to inflationary pressures of consumers. The company reported Q2 revenues of $33 million and cut 2022 revenue guidance to $135 to $140 million, reducing estimates by $10 million.

The tough retail and inflationary environment isn't helping current results at existing dispensaries, but the long term story is about opening new dispensaries and expanding the cultivation footprint. A prime example is MariMed only having 4 open dispensaries in Illinois with a maximum allowed up at 10 providing the ability to increase the stores in the state by 150%.

The small MSO is in the same scenario in Massachusetts, Maryland and Ohio with minimal assets open in the particular state and the ability to open up to a combined 14 additional stores. MariMed only has 8 operating dispensaries with the opening of the first location in Maryland on October 12.

The company is already adjusted EBITDA profitable in a big plus with a lot of smaller MSOs struggling to reach such profit levels due to the heavy expenses to build up the business. For Q2, MariMed produced adjusted EBITDA of $8.9 million with a margin of 27%. The EBITDA margin did dip from an unsustainably high 43% last Q2.

The company updated guidance for 2022 as follows:

• Revenue of $135 million to $140 million versus the previous range of $145 million to $150 million.
• Gross margin of approximately 50% versus the previous range of 54% to 55%.
• Non-GAAP Adjusted EBITDA of $35 million to $40 million versus the previous range of $47 million to $52 million.
• Capital expenditures of $18 million versus the previous target of $25 million.

Investors should be prepared for more weakness with the latest store not opening until Q4. Though, the one analyst covering the company is only at $135 million for the year with just a minimal bump in Q3 revenues to $34 million followed by MariMed reporting $36 million in Q4.

The approval of a second store in Massachusetts would set up MariMed for a strong Q4 with the store count going from 7 to 9 in just one quarter. The company has cultivation and kitchen expansions in Illinois, Massachusetts and Maryland to further boost product available for the market.

Priced For Death

MariMed has a fully diluted share count of 481 million shares with a lot of the stock options and warrants possibly never exercised with the stock trading down at only $0.52. The stock has a fully diluted market cap of $250 million, assuming all of the shares are actually exercised.

The irony is that the announcements by the Biden administration last week makes the small MSO stocks more attractive. The Canadian cannabis companies will look for small MSOs like MariMed to acquire due to offering access to numerous states to provide an entry into the U.S. cannabis market at scale without breaking the bank.

A new investor would provide the capital for MariMed to fully build out operations. The stock might trade like a penny stock, but the company is producing up to $40 million in annual EBITDA now and new stores in the Maryland and Massachusetts markets will substantially boost results.

Takeaway

The key investor takeaway is that MariMed isn't priced for the opportunity ahead. The small MSO has a strong growth path ahead and could easily be an acquisition target on Federal approval providing multiple catalysts for a higher stock price.

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