3 Businesses That Stand To Lose With Budding Marijuana Acceptance

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Includes: AAXN, ABBV, ABT, CXW
by: Aaron Barton

Summary

23 States have legalized medical cannabis, which can be used to treat a wide range of health issues.

Cost cutting has lead states to rethink sentencing guidelines and in some cases offer early release, especially to those who committed certain drug crimes.

Wind down of American military operations will result in a drastic cut in active troops.

Holy smokes, those ne'r do well kids are at it again, pressing their radical cannabis agenda.

In a vote of 231-192, the US House of Representatives approved HR 5016, which prohibited funds from being used to penalize a financial institution providing services to marijuana-related business that engages in activities permissible under state or local laws.

So the pot stores can use banks? Dope. I can like, pay with a credit card now, and earn miles and stuff.

Not exactly. Nothing says the banks are thrilled about the marijuana b(l)oom. But it is nonetheless further evidence that pot is here to stay. Call it an indubestrial revolution. The Apotcolypse. Call it awesome, man. Just don't ignore it.

There has been ample discussion about how to profit from marijuana, but little is said about those who stand to lose as ganja gains.

Keep in mind that changes in core business models, mergers, and policy shifts can all enhance or dull the impact of Americaijuana, but as it stands today, each of these businesses would be better off without advances in the legal status of weed, than full steam (smoke) ahead.

Slight risk

1. Abbive (NYSE:ABBV) This Abbot Laboratories (NYSE:ABT) spin-off is a research based biopharmaceutical company engaged in the discovery, development, manufacture, and sale of pharmaceutical products worldwide. According to the Company's most recent annual report, Flagship drug HUMIRA, which is used to treat a range of autoimmune diseases, accounts for nearly 60% of Abbvie's sales.

That trend is likely to continue until the Shire deal plays out. 2nd quarter results, which saw a spike in Humira sales (35.6% and 17.8% in the US and internationally, respectively) and a decline in the Company's next three best selling drugs, highlight the double-edged sword of relying on one or two really, really popular products. When things are good, they're great. But when they take a turn for the bad, not so much.

So?

There is mounting medical evidence, and perhaps more importantly acceptance, that other options, such as medical marijuana, might be able to provide varying degrees of relief without some of Humira's side-effects, often without needing medical insurance.

Did we mention that the Company's third largest market, The Netherlands, also has some pretty friendly pot laws?

Bottom line: Marijuana is a possible alternative to treat symptoms, but not necessarily the cause of several ailments that Abbvie produces drugs for. The Company is currently heavily reliant on revenues from a single product, but has an expansive pipeline and a planned billion dollar merger that will augment product offerings.

Moderate risk

2. Taser International Inc. (TASR) Taser International is engaged in the development, manufacture, and sale of conducted electrical weapons for use in law enforcement, federal, military, corrections, private security and personal defense markets worldwide.

The products are billed as non-lethal means to disarm or disable (temporarily) a threat, which could reasonably be assumed to include nearly 38% of the US population who has at one point tried marijuana, and thus committed a crime, according to Gallup. Eliminate an entire and statistically large class of crime and criminal, and you should in theory eliminate a substantial amount of policing and police, most of which use Taser products.

Sure, marijuana is expected to be a boon for taxing agencies, some of which fund police activities, but the Wall Street Journal published that of the $6 billion in drug related asset forfeitures from 2002 - 2012, nearly $1 billion was related to marijuana cases.

The possible reduction or elimination of this windfall may have an impact on purchasing decisions and agency fiscal woes.

Despite the Company's "worldwide" market definition, sales of its product outside the United States accounted for less than 17% of 2013 revenues. This means the Company is heavily reliant on a United States military force that the Pentagon plans to shrink to its smallest size since World War II, and a full time US police force that grew by 5.3% combined from 2004 - 2008 (date of last published Census of State and Local Law Enforcement Agencies).

Good luck with that.

Bottom line: Despite having enormous market share, the Company must figure out how to continue to grow sales in spite of known reductions in military size and a tepid growth in police forces. Legalization of marijuana may result in higher tax revenues (which can fund police and military activities), but it may also result in a reduced need for many of those same activities.

High risk

3. Corrections Corp of America (CXW) For-profit prison Corrections Corporation of America owns and operates privatized correctional and detention facilities in the United States. According to a USSC study cited in The Huffington Post, drug crimes accounted for 50.1% of offenses committed by the US Prison Population as of January 2014.

The most common drug among those offenders? Marijuana, at 27.6%. Sure, marijuana is still very much illegal at the federal level, and a significant portion (44% as of most recent 10K) of the company's revenues are derived from owning or managing prisons holding federal inmates, but even the Feds are reconsidering their draconian stance on drugs, with the DOJ issuing guidance this year that provides for clemency or early release of federal inmates meeting certain criteria (such as small scale drug crimes).

The next biggest customer is the State of a California, which accounted for 12% of CXW revenues in 2013 and 2012.

California does not recognize recreational marijuana, but it was an early adopter of medical marijuana, and based on a recent trip to Venice beach, committing a federal crime (aka smoking a joint) does not seem to stir up too much concern among law abiding citizens or enforcement.

Some believe it is only a matter of time before California permits recreational marijuana, which may further enhance the case for those behind bars in for-profit prisons to leave as a non-dangerous, but costly reminder of days and attitudes gone by.

Bottom line: Corrections Corp of America serves a niche that exists in part due to prison overcrowding and state budget shortfalls. Reductions in the prison population (ie due to changes in attitudes and legal status of marijuana) and increased tax revenue (due to taxes on marijuana, which can be as "high" as 75%) gives states the ability to bring back in-house the management of its prison systems, both of which can be a serious threat to for-profit prisons.

Its hard to argue that of three subject companies, Abbvie is best positioned to brush off any bud backlash with its massive size and deep pockets. It sells the world's most popular drug. Corrections Corp of America and Taser, however, both stand to benefit (sales-wise) from increased levels of crime, larger prison populations, and in general a continuation of the War on Drugs, which many, including Nobel laurates, have been calling an end to for years.

The best pure anti-pot play would likely be Corrections Corp of America. It stands to lose the most from continued state decriminalization advances which may ultimately lead to budges in the federal stance. Plus, even as a heartless rational investor, it's hard to feel good about profiting by taking money from tax payers to house a guy sitting in prison for twenty years for having a half ounce of pot.

Disclosure: The author is long ABBV. 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.