2023-05-02 16:20:57 ET
Summary
- Curaleaf announced Q4 and full-year 2022 results. Ugly with a capital U. Putting lipstick on a pig.
- The shares and market cap rise since mid-April. But CURLF loses its leadership position.
- The trend remains bearish. A double top is not a good technical sign.
- The future sits in Washington. Federal legalization remains the critical factor.
- A takeover could be the best option for a significant share price appreciation. Earnings are critical in the current environment.
I last wrote about Curaleaf (CURLF) on Seeking Alpha on April 11, pointing out the stock made new lows and had a cloudy outlook. CURLF shares traded to a new and lower $2.19 low on April 24, where they found at least a temporary bottom.
On May 1, CURLF was at the $2.61 level, recovering over 19% from the April 24 bottom as the market awaited the company's earnings report. CURLF and the other leading cannabis companies have had a rough time since reaching highs in early 2021. The rally that took the sector to highs on hopes the Biden administration and Congress would fast track federal legalization went up in a cloud of smoke and cash burn. Financing roadblocks, logistical issues, and other factors continue to weigh on cannabis stocks.
After the May 1 close, CURLF reported its latest much-anticipated earnings. Earnings are critical these days, so money talks and BS walks. After reviewing the numbers and comments during the May 1 conference call, CURLF's management may have been or should be smoking its product as it attempted to put a positive spin on some hideous results.
Curaleaf announced Q4 and full-year 2022 results
The market had expected CURLF to lose three cents per share when it reported on May 1. The 23-cent loss was more than disappointing for investors who had hoped for an upside instead of another downside surprise. The most recent quarterly loss was not a surprise but a shock. CURLF's revenue of $352.49 million was better than the EPS as it only missed by $1.86 million. The May 1 release on Seeking Alpha provides all the gory details.
In its conference call, management attempted to put lipstick on a pig:
Boris Jordan, the Executive Chairman, said:
2022 was another record year for Curaleaf that further solidified our leadership position in the emerging global cannabis industry." He commented, " the growth opportunity I see for Curaleaf in this nascent industry over the next three to five years is tremendous.
Matt Darin, the CEO, said:
We have much to be proud of, but we are not resting. We have more to accomplish as we build Curaleaf into the preeminent global leader in cannabis .
Ed Kremer, the CFO, said:
Fourth quarter net loss was $260 million, which included $225 million of non-cash goodwill impairment charges and inventory write-downs primarily related to our state exits. Full-year 2022 net loss was $370 million, and net loss per share was $0.52.
The CFO outlined cash flow and inventory issues:
I want to provide some color on the cadence of our quarterly cash flows. In Q1, we build inventory and have a large acquisition-related cash payment to make. Seasonal demand then accelerates in Q2, but we also make a large tax payment resulting in our lowest quarterly cash balance of the year. Then in Q3 and Q4, we begin building cash again. Our back-half cash build will also be boosted by the full benefits of our cost-reduction efforts taken earlier this year. For Q1, we expect revenue to be up low double digits versus Q1 '22 like-for-like revenue of $296 million, which excludes sales from California, Colorado, and Oregon.
My one takeaway from the numbers and comments is that CURLF must be growing and selling powerful stuff. Comments on leadership in a contracting industry, pride from accomplishments, and the cash flow position over the coming months seem to be spin that could be cannabis inspired. My grade on earnings does not fall into the Seeking Alpha factor grades, which operate on an A-F scale. I assign a U for ugly or a VU for very ugly.
Meanwhile, the company is burning cash.
CURLF shares and market cap rise
In my April 11 Seeking Alpha piece, CURLF shares were at the $2.40 level with a $1.71 billion market cap, leading the cannabis sector.
On May 2, CURLF's share price and market cap were slightly higher, but the company lost its leadership position.
The Leading Cannabis Companies by Market Cap (comapniesmarketcap.com)
The chart shows while the market cap slightly increased to $1.76 billion, the position slipped from first to third, hardly a leadership trend.
Chart of CURLF shares (Barchart)
Meanwhile, CURLF shares struggle not far above the late April low.
The trend remains bearish
The chart highlights the ugly bearish trend in CURLF shares. The stock attempted to rally before the latest earnings release but stopped at a significant technical level.
Short-Term CURLF Chart (Barchart)
The three-month chart shows CURLF rallied to $2.77 on May 1, creating a double top as the stock could not rise above the April 12 $2.77 high. Double tops are reversal chart patterns in technical analysis, suggesting a bearish reversal.
The future sits in Washington
The administration and Congress have a lot on their plate, with a debt ceiling crisis, bank failures, geopolitical turmoil, and more. Meanwhile, House Speaker Kevin McCarthy has allowed committee debate and a vote on a bill that would legalize marijuana on the federal level.
The U.S. capitol moves at a glacial pace, and cannabis legalization appears far down on the legislative totem pole with the debt ceiling deadline next month. As highlighted in the April 11 article :
The Republican majority in the House of Representatives and law enforcement's concerns about DUI and DWI factors and other marijuana-related issues make widespread federal legalization highly unlikely.
The lack of federal legalization handcuffs the U.S. cannabis industry as it's a roadblock to financing, credit card use, and logistics across state borders. While legalization makes sense from a tax perspective, Washington, D.C., faces a slew of other far more pressing issues.
It could be too late for survival
Since April 11, the number of leading cannabis companies on companymarket.com rose from 40 to 41, and the total market cap rose from $12.85 billion to $14.64 billion. However, on Aug. 8, 2022 , twenty-nine companies in the sector had a $23.44 billion total market cap. The cash and valuation burn continues, and the industry remains in a haze of Washington political smoke.
As I have written, the valuation trend supports takeovers and M&A activity. The cash-rich tobacco and cigarette companies are waiting in the wings and licking their chops at accretive opportunities. While Philip Morris's ( PM ) market cap edged lower from $153.78 billion on April 11 to $149.76 on May 2, Altria Group moved from $80.40 billion to $83.99 billion over the period.
The latest CURLF earnings were ugly, and management remains in an optimistic haze. The comments on Seeking Alpha were telling, with many blaming what they call allegedly " greedy " management. Anything but an objectively harsh reaction to the numbers may only be a case of cognitive dissonance.
The bottom line is the bearish trend looks set to continue. In the current environment, companies with earnings and cash are king, while those burning capital are likely to become a pile of ashes. M&A could be the only way out in a market where cash is king and investors are looking through lipstick on pigs.
For further details see:
Curaleaf: Earnings Talk While Promises Walk