Stifel Gets Bullish on the Cannabis Sector in 2020

According to a report by Barron’s on January 7, Stifel analysts expect a rebound in the cannabis sector in the first half of 2020. This expectation follows an especially disastrous industry-wide performance in 2019. In the year, the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) and the Cambria Cannabis ETF (BATS:TOKE) fell 37.41% and 37.88%, respectively.

Stifel expects Ontario to be a major growth driver for cannabis companies

In December, Ontario announced the elimination of the lottery system for license allocation and its plans to significantly open up the retail cannabis market. The province will be handing out 20 new retail licenses starting in April 2020.

According to Barron’s, the slower-than-anticipated retail rollout in Canada—especially in Ontario—was one of the biggest challenges for the cannabis sector in 2019. At the end of 2019, there were around 300 retail stores in Alberta. Despite having three times the population of Alberta, Ontario had less than 25 retail stores. This forced consumers to opt for black market players in Ontario. On the other hand, regulated players such as Canopy Growth (NYSE:CGC) were forced to buy back unsold inventory due to demand-side bottlenecks.

According to Barron’s, Stifel analysts expect the opening up of Ontario’s retail market to significantly boost the uptake of legal cannabis products in Canada in 2020. Stifel GMP analysts Justin Keywood and Robert Fagan also expect the total number of dispensing outlets in Ontario, including medical dispensaries, to reach 250 by the end of the year. The analysts also believe that the total number of stores in Ontario could eventually reach 800.

Keywood and Fagan believe there’s still more scope for retail expansion in Ontario, considering that there are 1,300 beer and liquor retailers there. Ontario’s current population is almost three times that of Colorado, yet the latter has 500 cannabis dispensaries.

Analysts are optimistic about the Cannabis 2.0 opportunity

On January 8, Cantech Letter highlighted the cannabis industry’s challenges associated with lacking retail infrastructure, falling wholesale prices, and product bottlenecks. These problems pulled down cannabis stocks in 2019, despite the year being the first full year of recreational cannabis legalization. However, the launch of Cannabis 2.0 products, such as cannabis-infused edibles and drinks, could reverse the industry’s fortunes in 2020.

According to Stifel analysts Keywood, Fagan, and Andrew Partheniou, the Cannabis 2.0 launch will almost double the addressable market opportunity for the cannabis sector. The analysts also expect Cannabis 2.0 to improve overall pricing and margins for the cannabis industry. They’ve highlighted the logistical and inventory challenges affecting Canada’s recreational market. However, the Cannabis 2.0 launch and expansion of retail infrastructure may sort out these problems. The analysts are thus optimistic about improvements in the fundamentals of Canadian licensed producers in 2020.

Stifel calls small cannabis company Fire & Flower a top pick

As reported by Cantech Letter, Keywood, Fagan, and Partheniou have chosen small Canadian cannabis player Fire & Flower (NYSE:FAF) as their top sector pick. The analysts expect the company to benefit considerably from the expansion of the market in Ontario. It already has 13 lease locations, mainly in high-traffic areas, in Toronto. Stifel analysts are also optimistic about FAF having the strategic support of Alimentation Couche-Tard. They’ve rated the company as a “buy” with a target price of 2.25 Canadian dollars. This target implies a potential upside of 131.96% based on FAF’s last closing price.

Four analysts have covered FAF on the TSE (Toronto Stock Exchange) in October 2019, December 2019, and January 2020. The rating mix hasn’t changed in all these months. One analyst rates the stock as a “strong buy,” while three rate it as a “buy.” In December 2018, two analysts covered the company. At that time, one rated it as a “strong buy,” while the other rated it as a “buy.”

Analysts’ average target price of 2.35 Canadian dollars implies a potential upside of 142.27%. Analysts first reduced their target price from 2.73 Canadian dollars in July 2019 to 2.58 Canadian dollars in October 2019. Their target price then fell to 2.53 Canadian dollars in December 2019.

Keywood’s revenue and EBITDA estimates for FAF

Keywood expects FAF’s fiscal 2020 revenue to be 163 million Canadian dollars. This revenue estimate is far higher than the company’s average revenue estimate of 50 million Canadian dollars as of January 2020. Analysts first reduced FAF’s fiscal 2020 revenue estimate from 66 million Canadian dollars in July 2019 to 57 million Canadian dollars in October 2019. In December 2019, they estimated FAF’s fiscal 2020 revenue to be 51 million Canadian dollars.

Keywood also expects FAF’s fiscal 2020 adjusted EBITDA to be -1.3 million Canadian dollars. Analysts, however, expect the company’s fiscal 2020 EBITDA to be -12 million Canadian dollars. They first reduced the estimate from -10 million Canadian dollars in July 2019 to -11 Canadian dollars in October 2019. After that, they further reduced it to -13 million Canadian dollars in December 2019.

Stifel has based its financial estimates on the assumption that FAF would expand its store network from 30 at the end of the third quarter. The research company expects this number to rise to 45 at the end of the fourth quarter of fiscal 2019 and to 110 by fiscal 2021. Stifel’s operating store estimate is lower than FAF’s own guidance of 135 stores by fiscal 2021. However, both the company and Stifel anticipate significant operating leverage for it. Stifel also expects FAF to become EBITDA positive by the fourth quarter of fiscal 2020.

Analysts expect US multistate operators to dominate in 2020

Stifel analysts expect US cannabis industry challenges such as the vaping crisis, capital crunch, and regulatory hurdles in mergers and acquisitions to reduce significantly in 2020. They expect robust cannabis market growth in states such as Nevada, Pennsylvania, Massachusetts, and Florida. Fagan and Partheniou have put Curaleaf (OTCMKTS:CURLF) and Green Thumb Industries (OTCMKTS:GTBIF) in their “Best Ideas” category.

The analysts expect Curaleaf to dominate Massachusetts’s recreational marijuana market. They also expect the company to penetrate Illinois’s recreational market. They expect its robust balance sheet and strong cash position to be a competitive advantage. Curaleaf can deploy its resources to target value-creating acquisitions. This advantage is especially important considering the overall capital crunch in the industry.

Stifel seems highly bullish about Curaleaf. The research company has rated it as a “buy” and given it a target price of 24 Canadian dollars, implying a potential upside of 204.96%. The average analyst target price for Curaleaf, however, is 16.24 Canadian dollars, which implies a much lower potential upside of 106.35%.

Stifel analysts expect Green Thumb Industries to continue outperforming the majority of US cannabis players in 2020, similar to 2019. They’re positive about the company’s strong financial performance, robust operational execution, and solid balance sheet. Green Thumb Industries can deploy its resources on organic or inorganic growth opportunities.

Unsurprisingly, Stifel is very bullish about Green Thumb Industries. The research company has rated it as a “buy” and given it a target price of 32 Canadian dollars. This target implies a potential upside of 163.59%. The average analyst target price for GTII, however, is 23.79 Canadian dollars, implying a much lower potential upside of 95.96%.

Optimism about Aurora Cannabis’s decision to sell one of its largest greenhouses

In September 2019, as reported by MarketWatch, Stifel Nicolaus analyst Andrew Carter rated Aurora Cannabis (NYSE:ACB) as a “sell.” The analyst also reduced the company’s target price from 7 Canadian dollars to 5 Canadian dollars.

On January 6, MarketWatch reported that Aurora Cannabis was selling one of its largest greenhouses located in Exeter, Ontario, to raise 17 million Canadian dollars.

As reported by the Financial Post, Aurora’s vice president of communications, Michelle Lefler, explained that this nonoperational facility would require significant capital and technical investment to make it compliant with the company’s production standards. The sale is ACB’s latest step in its attempts to reduce operational expenses and boost its overall cash balance. The company is also striving to align its production capacity with the existing market demand.

Following the news, Aurora Cannabis’s share price on the NYSE dropped 5% to $1.9 on January 6. The stock is already down 19.44% YTD (year-to-date). On January 6, the stock lost 5.38% and closed at 2.46 Canadian dollars on the TSE. It’s down 18.64% YTD on the exchange.

Despite the share pulldown, many analysts claimed that they weren’t surprised considering the company’s precarious financial situation. Carter claimed that he would have been concerned if the company was not selling assets at this time. He also highlighted the company’s focus on reducing cultivation to bring it more in line with demand. Carter has maintained a “sell” rating on the stock. He also believes ACB will require a significant amount of time before it becomes self-sustaining and generates positive cash flows.

MKM Partners analyst Bill Kirk expressed concerns

According to MarketWatch, Aurora Cannabis had previously expected to produce more than 105,000 kilograms of cannabis at its Exeter facility annually. The company added this facility through the acquisition of MedReleaf in 2018. MedReleaf had acquired the facility in exchange for 21.5 million Canadian dollars in cash and more than 200,000 shares.

According to MarketWatch, MKM Partners analyst Bill Kirk now expects a goodwill writedown of close to 2 billion Canadian dollars for ACB. The analyst expects more divestitures for the company since it’s facing a major cash problem. He’s also highlighted that the proceeds from Aurora’s sale of the Exeter greenhouse could last it for about two weeks.

Kirk was also concerned about Aurora’s lack of transparency about its strategy. The company failed to mention its plans to sell the facility in its corporate update on December 23. He also questioned Aurora’s lack of communication about the timing of its equity dilution related to the at-the-market equity facility.