Is Acreage Holdings a Good Buy in December?

Acreage Holdings (ACRGF) is a vertically integrated cannabis MSO (multi-state operator) with a presence in 20 US states. The company also has cultivation and manufacturing operations across 1.2 million square feet in the US. Acreage Holdings has 88 dispensary licenses in the US market.

Acreage Holdings stock has fallen 63.93% YTD (year-to-date) in the US OTC (over-the-counter) exchange. On December 20, the stock closed 77.13% below the 52-week high of $30. The stock has risen 22.28% from $5.61 on November 29 to $6.86 on December 20.

Acreage Holdings missed the revenue and earnings estimate

In the third quarter, Acreage Holdings’ revenues of $42.22 million were $1.83 million lower than the consensus estimate. However, the third-quarter revenues implied 307% growth YoY (year-over-year) and 26.2% sequential growth. The company’s revenue growth was driven by its wholesale sales, new dispensary openings, and targeted inorganic strategy. Acreage Holdings also reported a non-GAAP EPS of -$0.17, which was higher than the consensus estimate by $0.02.

Canopy Growth’s flagship brands

In April, Canopy Growth (CGC) announced a deal for the right to buy Acreage Holdings for a consideration of $3.4 billion. However, the completion of the deal is contingent on the federal legalization of cannabis in the US.

Acreage Holdings announced plans to introduce Canopy Growth’s two major retail brands, Tweed and Tokyo Smoke, in California and Michigan in August. In a phone interview with Bloomberg, CEO Kevin Murphy highlighted his expectations for the US-wide launch of Canopy Growth’s medical cannabis brand, Spectrum, in 2020. In the third-quarter earnings call, the company disclosed plans to launch Canopy Growth’s Tweed brand in Oregon, Maine, and Massachusetts in December. Acreage Holdings aims to position Tweed as its flagship brand in the recreational marijuana space.

Expanding presence in California and Florida

In its third-quarter earnings presentation, Acreage Holdings estimated the total addressable recreational marijuana market in California to be worth $5.6 billion by 2022. The company has managed to secure favorable reviews for its products in California. According to the third-quarter earnings call, the company’s Botanist wellness products and Natural Wonder sublingual sprays were rated as top brands among 350 brands at the Hall of Flowers marketing event in California.

In December 2018, the company announced the acquisition of Form Factory for a consideration of $160 million. Form Factory manufactures and distributes cannabis-based edibles and beverages. Notably, the deal added Form Factory’s growing and processing licenses and operations in Portland, Los Angeles, and Oakland to Acreage Holdings’ portfolio. Form Factory became operational in Oakland in the third quarter. The company started manufacturing cannabis-infused wellness beverage shots and quick-dissolve cannabis-infused tablets at the facility.

In the third-quarter earnings presentation, Acreage Holdings estimated the total addressable medical marijuana market in Florida to be worth $1.6 billion by 2022. Also, the company started constructing a 100,000-plus square foot Sanderson cultivation and processing facility. The facility will likely be operational by mid-2020. The company plans to start supplying cannabis from its Miami cultivation facility to the first dispensary in Spring Hill.

Analysts’ recommendations for Acreage Holdings

There are ten analysts covering Acreage Holdings on the US OTC exchange today. Three recommend a “strong-buy,” five recommend a “buy,” and two recommend a “hold.” Overall, the analysts have given the stock a target price of $13.25, which implies an upside potential of 93.15% compared to its last closing price.

In November, ten analysts covered Acreage Holdings. Four analysts recommended a “strong-buy,” five recommended a “buy,” and one recommended a “hold.” They set the target price at $13.85.

Seaport Global remains optimistic

On November 27, as reported by TipRanks, Seaport Global analyst Brett Hundley reiterated the “buy” rating for Acreage Holdings. However, he reduced the target price from $15 to $14.

In the updated model, Hundley reduced the company’s forward revenue projections and the anticipated EBITDA losses. He expects the company’s fiscal 2020 sales and EBITDA loss to be $221.8 million and $3.4 million, respectively. As a result, Hundley is confident about Acreage Holdings’ geographic market expansion strategy across the US. He also highlighted the company’s better access to financing due to its relationship with Canopy Growth.

Beacon Securities is confident in the retail strategy

On November 15, as reported by CANTECH LETTER, Beacon Securities analyst Russell Stanley reiterated the “buy” recommendation for Acreage Holdings. However, he reduced the company’s target price on the CSE (Canadian Securities Exchange) from 27 Canadian dollars to 17 Canadian dollars. Stanley highlighted that the company’s third-quarter pro forma revenues of $42.2 million were lower than his estimate of $47 million. Meanwhile, the company’s third-quarter pro forma EBITDA of -$9.0 million was also lower than his estimate of -$4.0 million.

However, he expressed optimism about the company’s third-quarter performance and its retail buildout strategy. Acreage Holdings’ management expects to exit 2019 with 35–45 operating dispensaries. So far, the company had a total of 33 dispensaries as of November 15, which included four awaiting regulatory clearances. Stanley is confident about the company’s retail rollout timeline. While he thinks that the company can adhere to construction timelines, the regulatory clearances might delay the dispensaries opening to the first quarter of fiscal 2020.

Stanley expects the regulatory changes in New Jersey, Maine, and California to enable Acreage Holdings to consolidate its financial results starting the first quarter of fiscal 2020. The consolidation might help reduce the differences in the IFRS and pro forma results. In addition, consolidation could lead to higher transparency for the company’s financials.

The analyst expects the company’s revenues to be $103 million in fiscal 2019 and $431 million in fiscal 2020. He also expects the company’s adjusted EBITDA to be -$22 million in fiscal 2019 and $75 million in fiscal 2020.