Back in October it was widely publicized that one of the largest beer, wine, and spirits companies in the world, Constellation Brands (STZ) was going to acquire a minority (9.9%) stake in Canopy Growth (TWMJF). Of course, this resonated with investors in the industry and in turn sparked a rally within the market.
What seems to have begun with the Constellation/Canopy Growth deal has evolved into something much more exciting that could further set the stage for 2018 to be a year for big M&A as well as the beginning of Blue Chip companies taking a seat at the table.
Traditional companies that have not been involved in the marijuana sector are starting to trickle into the legal cannabis industry. This continues to expand the growing list of marijuana stocks that investors can monitor as this industry grows.
Canada’s Passage Of Bill C-45 Continues To Heat Things Up
Right now Canada may pose a more near term opportunity for the simple fact that with the passing of the second reading of Bill C-45 to legalize marijuana across the country, the Canadian market has far less barriers to entry from a banking angle. Additionally, the motion to legalize recreational and the already legalized medical marijuana now places cannabis on the same level as things like alcohol and tobacco. Along with the Canadian Prime Minister taking a clear side on the issue in favor of legalization, the move has attracted much more interest into the country’s marijuana industry.
“We expect a more independent Senate will do its work, to look at legislation sent by the House of Commons, that they evaluate the positive impacts on the community, that they bring ameliorations, if needed. But it is very clear that this bill responds first to an electoral promise that we made very clearly during the election campaign and for which Canadians voted, and also that is something that we will continue to work on with different levels of government,” stated Trudeau in an interview.
Up Next: Wal-Mart, Home Depot, Amazon, & More?
This being the case, it may or may not come as a surprise that other “blue chip” companies are beginning to get their hands dirty in the ever-growing cannabis industry. An announcement from the American Cannabis Company (OTCQB:AMMJ) revealed that companies including Wal-Mart (WMT), Home Depot (HD) and Amazon (AMZN) will now be selling certain products that the company offers.
Before you start thinking ahead, it was reported that these three retailers will be selling the products via online store platforms and furthermore, we aren’t talking about the actual plant (yet). American Cannabis’ SoHum Living Soils® potting mix and Dr. Marijane Root Probiotic will be offered on these ecommerce platforms for purchase.
Terry Buffalo of American Cannabis Company said there would be further opportunities that the company will look to take advantage of, “ACC will continue to evaluate other online sales platform opportunities as they present themselves. We are committed to getting our products out in the market and into the hands of the cultivators who can truly benefit from these solutions that we provide.”
For companies like American Cannabis who are focused on more of the "pick and shovel" side of the ecosystem, an alignment with companies like Walmart, Amazon, and Home Depot (especially for ecommerce) open up a wide lane to benefit from ecommerce sales. Walmart’s e-commerce sales, for instance moved up by 44% to $11.5 billion. This was the equivalent of roughly 3% of total U.S. ecommerce sales.
Furthermore, according to the earnings transcript on SeekingAlpha, online sales for Home Depot grew 21% in the fourth quarter and 21.5% in fiscal 2017. This equated to just under $7 billion ($6.76B) of the company's $100.9 billion in revenue for 2017. These may be large figures to most (and they certainly are) but then again Amazon contributed about 44% ($199 billion) of all U.S. ecommerce sales last year ($453.5 billion).
Some companies like Wal-Mart already had a bit of time in the green hue of the cannabis limelight when it released a marijuana leaf Christmas tree, which was abruptly pulled from its website. Besides some novelty pet items like Meowijuana - Purrple Passion Catnip Buds however, this latest sales channel for American Cannabis seems to be the real debut for Wal-Mart’s entry into the weed business.
The benefit at this point may lean more toward American Cannabis and less in favor of Wal-Mart at least until Wal-Mart makes its own investment into the arena like Constellation did. It could also benefit more directly by deciding to begin selling potted cannabis plants or dry herbs on their shelves as well but that most likely won't be something that the US market sees until recreational legalization is nationwide. It does, however, get their feet wet to gauge demand for certain products.
For American Cannabis however, being able to take advantage of 3 new avenues for online sales could help with both exposure and increased sales. With the case of Home Depot, for instance, the SoHum Living Soils® potting mix and Dr. Marijane Root Probiotic would fall into the "garden" category of the company's financials. This segment alone increased from $15.99 billion in 2016 to $16.67 billion in 2017, a 4% increase year over year. Therefore, American Cannabis and other companies like it could benefit not only from growth of online sales but also from overall growth of this segment in general.
Scotts Miracle-Gro (SMG) is another “non-cannabis company” being monitored by cannabis investors since it dipped its toe into the green waters of this industry. Similar to American Cannabis, Scotts is dealing directly with the garden category. After the company acquired Hawthorne Gardening, which serves the indoor gardening needs of its customers, Scotts’ business is opening up to a whole new clientele. For Scotts and quite possibly for American Cannabis however, the jump to offer various growing mediums to be sold in big box retailers like Wal-Mart & Home Depot may not necessarily be the near term opportunity some are looking for.
Scotts Miracle-Gro reported that sales from its Hawthorne segment fell $12 million in 1Q18, excluding acquisitions. Including acquisitions, sales from the segment increased 20% year-over-year to $76.7 million. Much of this had to do with the delay in California’s legalization of marijuana according to the company, however.
Nonetheless, by the time the figures have been reported there have been over 3,000 licenses issued to commercial cannabis businesses across the state of California and three licensing authorities have issued over 5,000 commercial cannabis licenses as well.
California is expected to see market growth top $3.7 billion by the end 2018, and is anticipated to generate a total economic output of $40 billion by 2021. It would stand to reason that companies who have a firm handle on this market by the end of 2018 will benefit from the California market getting into full swing.
Not Just Home And Garden Options:
Look At Options In Tech, Biotech, And Health Care That Will Expand The Industry's Reach
IBM (IBM) may not be one of the companies that come to mind when cannabis is mentioned but they could be carving their own niche in the marijuana industry right now as well. The company, known for its cloud technology and Watson platform, is actually taking advantage of the digital ledger system, blockchain and working to apply it to the marijuana space.
We’ve all heard by now that blockchain technology is the wave of the future and now IBM is pushing to have it tracking “seed to sale” transactions. “This type of transparency would bring a new level of visibility and control to the provincial regulators and provide assurance to the multitude of cautious stakeholders regarding the way the management of a cannabis supply chain is rolled out within British Columbia,” IBM said.
But IBM isn't the first big tech giant to enter into the cannabis space. A few years back, Microsoft (MSFT) through its Microsoft Health and Human Services Pod for Managed Service Providers division teamed up with KIND Government Solutions to acquire "government-facing contracts" for seed to sale tracking. The company's Agrisoft Seed to Sale for Government product compiles and further oversees the important data that is needed to track compliance with the state and jurisdictional laws for cannabis businesses.
Though KIND is not publicly traded, a company like Microsoft could become direct competition for a company like IBM who is also tracking seed to sale transactions. There has not been a mainstay to this point in the early stages of the industry but if there's one thing certain, tech will be something to monitor as the cannabis industry grows. Between these two tech companies alone, you have more than $800 billion worth of company heavyweights targeting the same niche.
Other Blue Chips That Are Opening Up To Marijuana
It isn’t just tech or cultivation that has market heavyweights entering the space either. You’ve also got some companies taking a piece of this marketplace in biotechnology as well. Canadian medical marijuana company Tilray signed a binding letter of intent to work with Sandoz Canada Inc., an affiliate of Sandoz International GmbH, which is part of the Novartis Group (NVS). The agreement intends to have the companies create new cannabis-based medications where Sandoz will act to distribute the drugs to hospitals and pharmacies.
“The alliance is a major milestone on the long road to legitimizing medical cannabis as conventional medicine,” Tilray Chief Executive Officer Brendan Kennedy said in a statement.
Sandoz is responsible for roughly 21% (up from 20% in 2016) of Novartis' annual revenue, which booked $2.3 billion of nearly $13 billion in Novartis total revenue for the year. Considering this, the Tilray agreement could dually benefit both entities. Sandoz's growth could benefit Tilray in providing more medical product & expanding their distribution network via Sandoz Canada's network. Sandoz will benefit by working with one of the leading cannabis companies in Canada to expand its reach into the large, medical marijuana market.
Tilray’s parent, Privateer Holdings is no stranger to this marketplace either and has raised its fair share of capital for cannabis-related companies. This includes Leafly, Marley Natural and The Goodship in addition to Tilray. Paypal (PYPL) co-founder Peter Thiel’s Founders Fund also made a significant investment into Privateer in 2015.
Also keep in mind Tilray along with a few other companies are actively signing deals for distribution through traditional channels such as pharmacies; Shoppers Drug Mart in particular. In addition to Tilray, last year Aphria (APHQF) announced a five-year partnership with Shoppers Drug Mart, which is part of the Loblaw Companies (TSE: L). The Aphria and Shoppers agreement will see the Leamington, Ont.-based grower become the "first and preferred supplier of medical cannabis" to Shoppers Drug Mart. Though there haven’t been talks yet as to Aphria will supply Shoppers with recreational versions of cannabis, the initial goal is to target medical products in all of the locations that the drug store has.
There are 1,300 Shoppers Drug Mart and Pharmaprix locations to get products distributed through. One issue that may arise in Canada for the marijuana industry & Shoppers' supply partners specifically is that in addition to Aphria, Shoppers now deals with MedReLeaf (OTCPK:MEDFF), Tilray, and Aphria, which could increase cross-channel competition in general. Shoppers Drug Mart saw revenue growth of 3.6% in Q4 2017 compared to 3.4% during the same period of 2016.
Total revenue for drug sales came in at CAD$3.72billion with an annual total of CAD$12.58 billion for fiscal 2017. On the other hand, as more demand increases for marijuana in Canada, not only could Shoppers (Loblaw) see sales increase due to new segment growth via marijuana but also companies like Aphria, MedReLeaf, and Tilray could also realize a boost in sales as a result.
Aphria and MedReleaf are the only two cannabis companies that have turned a full-year profit in the past two years, consecutively. That is compared to the other, large marijuana companies in Canada like Canopy and Aurora (ACBFF). Aphria's first 6 months of its fiscal 2018 year showed that the company reported over CAD$14 million in revenue. This was up over 50% compared to the same period in 2016. MedReLeaf ended up booking over CAD$40 million for the full year of 2017, which was up from CAD$19.3 million the year prior.
A Step In The Right Direction For The US?
Even though marijuana is legal recreationally and medically at a state level, the federal government in the United States still sees it as a Schedule I substance but new legislation could be setting a different tone. Under a government-wide spending legislation signed by President Trump last Friday,
those who have been prescribed and use medical marijuana (As well as the businesses that follow state laws to sell medical marijuana) will be protected from U.S. Attorney General Jeff Sessions. This isn’t a new idea. The law has been in place since 2014 but this has confirmed the extension of its protections until at least September 30.
Though this isn’t as big of an event as Canada’s national legalization, it is another step in the right direction for the United States. Roughly 60 House Republicans and Democrats wrote in a letter:
“The issue at hand is whether the federal government’s marijuana policy violates the principles of federalism and the Tenth Amendment. Consistent with those principles, we believe that states ought to retain jurisdiction over most criminal justice matters within their borders. This is how the Founders intended our system to function.”
I’ve written many times in the past that this industry is heavily event driven and certainly national legalization in places like Canada has its place in the discussion right now. But also keep in mind that other events such as this latest move by the US government and companies like Wal-Mart, Home Depot, and even Novartis are much more open to having their names associated with a once “illicit” drug can also be a catalyst to prompt industry-wide moves.
As for now, 2018 could see more Blue Chip companies finding ways to get involved and the fact that Canada is at a point where cannabis will be completely legal, will make this year a litmus for what could also be in store for the US, should it follow suit.
Capital raises and M&A activity in the cannabis industry within the first 5 weeks of 2018 alone saw investments into cannabis companies surpass $1.2 billion. This was the equivalent of the industry’s deals in 2016, in total.
“[Family offices] are not necessarily investing on behalf of the firms they work with. We also know several private equity and venture capital groups that are out of the cannabis space, but actively looking for ways to play. And there are other big financial groups that are highly interested,” Harrison Phillips of Viridian Capital Advisors said in a statement.
This continues to support the idea that there is still a long and opportune road ahead for investors. Many of these blue chip companies are choosing to invest in marijuana companies or align themselves with them through working partnership for sales & distribution rather than go it alone (similar to what IBM seems to be doing). This could pose an opportunity for investors to either participate directly or diversify by investing in companies that have some kind of involvement within the industry, such as Constellation or Novartis.
Typically, the closer we get to the summer season, the slower the industry gets. However, with the amount of deals happening right now along with the unique timing that Canada has for flipping on the switch for legal marijuana, 2018 could be a different year all together, one that sees large conglomerates getting involved. The opportunity for investors could come down to being able to benefit from these buyouts, mergers, and strategic investments early on.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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