Should You Buy IIPR before Its Q1 Earnings?

Amid the global sell-off due to concerns about COVID-19, Innovative Industrial Properties (NYSE:IIPR) fell to $40.21 on March 18. However, the approval of several stimulus packages and optimism about the declining rate of the outbreak led to a rise in the company’s stock price. As of May 1, the company was trading at $75.13, which represents an increase of 86.8% from the March 18 lows. Despite the surge, the company is still trading 46.2% lower than its 52-week high of $139.53.

IIPR will likely report its first-quarter earnings, which ended on March 31, after the market closes on May 6. So, should you buy the stock ahead of its earnings? First, let’s look at analysts’ first-quarter expectations.

Analysts expect IIPR’s revenue to rise

For the first quarter, analysts expect IIPR to report revenues of $21.4 million—growth of 213.8% from $6.82 million in the first quarter of 2019 and 21.1% from $17.67 million in the fourth quarter of 2019. I think that acquiring new properties could drive the company’s revenue. As of March 11, the company operated 53 properties located across 15 states covering approximately 3.8 million rentable square feet. In the first quarter, the company has acquired and leased 11 new properties located in various states. The acquisitions could drive the company’s revenue.

Analysts expect IIPR’s EPS to fall sequentially

Analysts expect IIPR to report an adjusted EPS of $0.75, which represents a rise of 126.5% from $0.33 in the first quarter of 2019. However, sequentially, the company’s EPS will likely fall by 4.2% from $0.78 in the fourth quarter of 2019. The increase in the number of shares outstanding could drag the company’s EPS down. Analysts expect that the number of shares outstanding could rise from approximately 12 million in the fourth quarter of 2019 to 16 million. However, revenue growth and the expanding EBIT margin could offset some of the declines. Analysts expect IIPR’s EBIT margin to improve from 60% to 71.5%.

Analysts’ recommendations

Since IIPR reported its fourth-quarter earnings, Compass Point has reduced its target price, while Roth Capital and Craig-Hallum have started covering the stock. On March 19, Compass Point cut its target price from $150 to $75. Meanwhile, on March 16, Roth Capital initiated its coverage on the company with a “buy” rating and a target price of $110. On March 10, Craig-Hallum started covering the company with a “hold” rating and a target price of $95.

Overall, five analysts cover the stock. Among the analysts, 80% recommend a “buy,” while the remaining 20% recommend a “hold.” None of the analysts recommend a “sell” rating. As of May 1, analysts’ consensus target price is $100.10, which represents a 12-month return potential of 33.2%.

Stock performance and my take on IIPR

So far this year, IIPR has lost 1.0% of its stock value as of May 1. The company’s stock price fell due to weakness in the cannabis sector and the COVID-19 outbreak. Despite the fall, the company has outperformed Curaleaf Holdings (OTCMKTS:CURLF), MedMen Enterprises (OTCMKTS:MMNFF), and Cresco Labs (OTCMKTS:CRLBF). During the same period, Curaleaf, MedMen, and Cresco Labs have fallen by 25.9%, 62.1%, and 42.6%, respectively. Meanwhile, the ETFMG Alternative Harvest ETF (NYSE:MJ) has also declined by 32.5%, YTD. The company’s impressive fourth-quarter performance and aggressive expansion limited its downside.

Many cannabis companies have struggled to raise capital. Cannabis is still prohibited by the federal government. Meanwhile, IIPR provides the much-needed capital by buying these companies’ assets and leasing them back. So, the decline in cannabis prices doesn’t have much of an impact on IIPR’s margins. While most of the cannabis companies struggle to attain profitability, IIPR reported an adjusted EPS of $2.03 last year—growth of 170.7% YoY from $0.75 in 2018. Also, the company has beat analysts’ expectations in the last four quarters. So, I’m bullish on the stock. I think that investors should buy the stock before its first-quarter earnings.