Tweed: Making All The Right Moves

Aug. 2.14 | About: Canopy Growth (TWMJF)

Summary

Canadian marijuana industry is growing.

The industry is in limbo but to Tweed's advantage.

Tweed has made a number of smart moves in the last 3 months.

Tweed has the cash to grow.

Tweed (OTC:TWMJF) is one of the first marijuana companies to list on the stock exchange. It owns and operates a 180,000 sq ft production facility in Smith Falls, Ontario and a second 350,000 sq ft production facility in Niagara-on-the-Lake, Ontario. It was granted one of 12 licenses approved by Health Canada to grow and distribute medical marijuana. This license permits production of up to 15,000 kg of dried marijuana a year. The company has not released any revenue figures yet since it only shipped its first supply in May 5, 2014.

Industry Uncertainty

There is clearly a demand for marijuana in Canada and Tweed has the supply to meet it. Based on Health Canada's estimates, the current number of medical marijuana users is at 38,000 in 2013. By 2024, this number will rise to 450,000. This is over a 25% growth year over year. At a price of $8.80 per gram, this represents a $9.9 billion industry by 2024. The only issue is supply and demand is never that simple when weed is involved. To pave the way for businesses like Tweed to enter the marijuana industry, a date was set in April to ban homegrown medical marijuana. Only government approved vendors were allowed to grow, sell, and distribute marijuana. The Supreme Court of Canada temporarily put a hold on these plans by granting a temporary injunction to allow a group of marijuana patients to grow their own weed. Health Canada is currently appealing the decision but whatever the outcome, it doesn't bode well as the government wants to develop the industry. A final decision is not expected to be reached until mid-2015, which means Health Canada may not issue new licenses until then. I think this is to Tweed's advantage since the license approval delays should give Tweed time to promote and sell its own products

While the government is trying to bring in more competition into the industry, it is also on the other hand making it difficult on existing marijuana producers. Health Canada forbids the marketing of marijuana to the public. As well, any personnel changes in the company must be reported to Health Canada. These stringent regulations over time will tax company resources and time. One case in point is through Tweed's financial disclosures, its production facility in Smith Falls must undergo a second review of its security.

Some Gutsy Moves by Tweed

Despite the challenges in the industry and the heavy government regulations, I am still bullish on Tweed's outlook. Here is why:

  • June 19, Tweed acquired a 350,000 sq ft production facility in Niagara-On-The-Lake to growing the breadth of its product offerings.
  • July 3, Tweed had signed research deals with University of Ottawa and Ryerson University on the long term effects of marijuana
  • July 31, Tweed is adding new varieties of weed to its inventory starting in August and September

While 700 other companies (the number currently on the waiting list for license) are waiting for its license approval from Health Canada, Tweed already has its license, and can focus on the business itself. Currently, Tweed's strategy is on two fronts: increasing production capacity and marketing its brand. Tweed's acquisition of a production facility in June shows its commitment to rapidly become a nationwide grower. Also, it has already accelerated its capital expenditure spending to increase production capacity in Smith Falls.

As for the partnership with local universities, the goal is to conduct research on further health benefits in marijuana and finding new methods to increase growth yields. This type of initiative shows Tweed is also focusing on the long term as they seek ways to increase efficiency in growing marijuana. I believe Tweed is showing incredible foresight in first establishing partnerships with universities and thus building connections with researchers and doctors.

Part of Tweed's marketing strategy is to increase the breadth of different marijuana and it has done so by adding more varieties to its inventory. Other marketing initiatives conducted by Tweed include sponsoring medical community events and establishing stronger ties with doctors and medical practitioners.

While most other marijuana firms are waiting to be granted approval to sell marijuana, Tweed has enjoyed the first mover advantage by quickly moving into the industry and creating a brand in the marketplace. This is quite a feat considering they were just granted the license in less than a year ago.

Industry Competitors:

Delta9, Organigram, and Bedrocan (CVE:PCC.P) are amongst the 12 companies currently licensed to sell marijuana in Canada. Delta9 based in Winnipeg is currently seeking an investment partner to take its company forward. Its marijuana prices ranges from $5 to $9 per gram, averaging out at $9.

Organigram is a start-up located in New Brunswick. The firm has a 20,000 sq ft production facility with expectations to start selling marijuana at average prices of $7 per gram. It is currently privately owned and as of early January 2014, it is still seeking further funding from capital partners.

Bedrocan is a Canadian company established as a joint venture Bedrocan BV in Netherlands. It is looking to IPO soon as its Qualifying Transaction was recently approved by the TSX. On average, Bedrocan sells its marijuana at an average price of $7.50 per gram.

Tweed currently has 23 different marijuana varieties on its online shop with price ranges from $5 to $12. Based on the pricing alone, Tweed is positioning itself to be a premium marijuana seller in the marketplace.

A Lot of Industrial Noise Overwhelming Tweed

In recent weeks, Tweed stock has taken a tumble. In using the relative strength index, the figures show the stock has been oversold in the last three days:

Tweed Relative Strength IndexClick to enlarge

If the RSI is below 30, it means the stock is oversold. Over 70 it means it has been overbought. From July 25 to July 29, the RSI has been consistently below 30. I think the drop has more to do with recent negative media reports and the uncertainty of marijuana companies operating in Canada. Tweed has ample cash to execute on its strategy. It successfully raised $15 million in May 2014. As of March 31, 2014, its cash stood at $7.7 million. The acquisition of a second facility in Niagara-on-the-Lake in June 2014 was at $3.7 million. Based on the March 31 2014 financials, excluding one-time items, expenses were at $1.6 million. This leaves about $17.4 million in cash for Tweed to invest with. The $17.4 million figure will likely be lower because Tweed recently has been engaged in a number of new partnerships and ramp up of capital spending. But even then, March 31 financials show Tweed - for now - has a relatively strong balance sheet.

Conclusion

At the end of the day, I believe the federal government will get what it wants in having an open competitive environment for marijuana producers. So despite all the short term noise in the industry and from the government, I think Tweed does have its fundamental strengths.

Tweed also has the first mover advantage. While other companies are trying to secure licenses or secure proper financing, Tweed has already completed all this and is looking for avenues to grow. In the last three months, it announced a list of initiatives to build relationships with the medical community, focused on R&D to improve its product line, expanded its list of products, and made a gamble by acquiring a second production facility. It is doing all this to position its brand as a premium grower of marijuana. In time, Tweed should come out being a stronger company in the long run.

Disclosure: The author is long TWMJF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.