2023-04-17 19:06:10 ET
Summary
- Curaleaf Holdings, Inc. guided to $125 million in free cash flow this year after exiting several tough state markets.
- The cannabis space remains a regulatory landmine with the license renewal drama in New Jersey.
- The stock is incredibly cheap with the market pricing in the worst case scenario and Curaleaf trading at only 3x 2023 adjusted EBITDA targets.
The U.S. cannabis space continues to crater, yet the end sales opportunity hasn't changed much. Curaleaf Holdings, Inc. ( CURLF ) remains a leader in the cannabis space, but the company delaying quarterly earnings isn't helping the stock with the new focus on strong profits. My investment thesis remains even more Bullish on the stock the lower it falls, especially with the New Jersey license issue apparently cleared up so quickly.
Focus On Profits
The U.S. cannabis companies have become increasingly profitable as the growth opportunities slow in the country. The cannabis market still has plenty of growth potential ahead, but an increasing number of states have already legalized recreational cannabis and other states like New York have implemented preventative licensing plans for multi-state operators (MSOs).
A couple of months back, Curaleaf made a drastic decision to exit West Coast state markets to streamline the business. The MSO exited most of the operations in California, Colorado and Oregon.
Along with cutting payroll by 10%, Curaleaf forecasts saving $60 million in annual costs while eliminating businesses that contributed only $50 million in 2022 revenues. Even assuming a full 49% gross margin on the exited business, the MSO is only giving up $25 million in gross profits and the amount is likely much lower considering the move is EBITDA accretive on a margin basis.
The market is use to focusing on revenue growth for the cannabis space, but the new narrative needs to be shifted to focusing on profits. Curaleaf now forecasts free cash flow generation for the year of at least $125 million.
The investment story should be vastly more positive now with an industry lacking capital to invest in new cultivation facilities and stocks crushed reducing the desire for new competitors to rush into the space. Not to mention, the decisions by states like New York to exclude the MSOs from the recreational cannabis licensing process naturally reels in investment dollars for the sector.
Curaleaf has sued the New York State Office of Cannabis Management over the restrictive dispensary licensing. The New York cannabis market was set to offer up to $5 billion worth of sales, but the state moved to block MSOs from recreational cannabis licenses.
The state officially launched recreational cannabis back on December 29 and only 3 retail dispensaries are open. Between the MSO lawsuit, a lack of retail space affordable to social equity aware winners, especially considering so many municipalities have opted out of approving recreational sales.
The sudden reversal of the New Jersey Cannabis Regulatory Commission to reverse a decision to not approve the MSOs adult-use license renewal is a positive sign for Curaleaf. Not only does it keep some profitable licenses on the books, but also it signals the potential for the neighbor state to reverse licensing decisions not necessarily made on legal grounds with a focus on social equity licenses.
Crushed To Oblivion
The stock has seen the market cap collapse below $2 billion now with the dip to $2.50. Curaleaf had to delay Q4'22 earnings until April, but the MSO is forecast to hit sales of $1.34 billion for last year with a target of $1.55 billion in 2023.
Analysts predict the following adjusted EBITDA targets for the years ahead. The stock trades at nearly 3x EBITDA targets of $527 million for next year.
Considering Curaleaf is now forecast to produce $125+ million in free cash flow this year while paying restrictive 280E taxes, the MSO should correct some of the balance sheet structure without relief from restrictive taxes. The company ended Q3'22 (last reported quarter) with a cash balance of $198 million and $599 million in outstanding debt for a net debt of $401 million.
Curaleaf doesn't pay massive interest rates, but even the senior secured debt has a fixed interest rate of 8.0%. The free cash flow will quickly cut interest costs with the repayment of this debt in the future.
Takeaway
The key investor takeaway is that Curaleaf Holdings, Inc. isn't priced for the current profitable narrative of the business. The market has priced in the worse-case scenario, where the Curaleaf Holdings, Inc. MSO doesn't get a recreational cannabis license in New York and the New Jersey license renewal is denied again.
Investors should use the ongoing weakness in the cannabis space to load up on a sector leader trading at multi-year lows while on the path to generating massive cash flows.
For further details see:
Curaleaf: New Narrative Despite New Jersey Drama