Cannabis Roundup: Canopy, Aurora, And More

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Includes: ACB, CGC, HEXO, TLRY
by: Daniel Jones
Summary

The month of January was a busy time for many cannabis firms, particularly the bigger players out there today.

Investors flooded into these firms, especially those that proved they could complete multiple transactions geared toward establishing strong growth.

These firms are quickly moving to try and consolidate and take advantage of this fast-growing, optimism-fueled market at all costs.

So far, many of the firms in the cannabis space have started off 2019 on the right foot. Not only have we seen a number of developments (many material and some small) from the major players in the space, we have seen investors happily greet the news and push shares of these prospects higher. As a group, the big cannabis names warrant some discussion, and investors would be wise to weigh the prospects of each not necessarily by their fundamentals as they stand today, but by how various maneuvers by the firms will set them up for future growth down the road.

The big boy is still leading the way

Of four of the big cannabis names I decided to cover in this article, the one undoubtedly at the head of the pack is Canopy Growth Corp. (CGC). Throughout January, the company reported for investors a series of developments across the board. For starters, earlier in the month, management released a statement reaffirming the firm’s strong market position. In that release, the company said that in its first season, they managed to harvest more than 190 million square feet worth of CBD-rich hemp genetics in Saskatchewan. This harvest, management believes, will result in around 7 thousand kg (kilograms) of hemp-based CBD per year. In addition to posting strong organic figures, the company further touted its IP (intellectual property) position, with more than 40 different cannabis-related patent applications already out there that, collectively, cover somewhere around 1,500 inventions.

What this data points to is a good season, likely, for the firm’s primary operations in Canada, while its IP progress can actually help to fuel growth in all of its key markets. Outside of Canada, though, management also came out with new sets of operations in different parts of the world. One of these, which I wrote about in detail, was management’s decision to invest between $100 million and $150 million into the industrial hemp space in New York. In addition to this, though, the company decided to expand its operations in its Canopy LATAM Corp. subsidiary, which handles its operations throughout Latin America. Based on the press release issued by the firm, this new company, known as Spectrum Cannabis Peru S.A.C., will focus on establishing itself as a medical marijuana firm. This will naturally serve as a great point of business for the firm as it seeks to make use of the 13.6 million square feet of attractive farmland that it has in Colombia.

Across the pond (in Europe to be precise), Canopy continues to focus on its expansion efforts. Recently, the firm established a new subsidiary that it is calling Spectrum Biomedical UK. This new business will work to promote medical-based cannabis throughout the country following a change in legislation that occurred on November 1st of last year. This new change will allow doctors in the UK to prescribe medical marijuana for various ailments like helping to treat MS (multiple sclerosis) and reducing nausea and other side effects related to chemotherapy. Also in Europe, the subsidiary successfully exported its first ever shipment of medical cannabis to Poland last month, a market that it identified as having up to 300,000 people.

Clearly, these moves for Canopy over the past month have been deliberate attempts by management to extend its reach on a more global scale. This is perfectly logical because as many nations move to either permit medical cannabis and/or to loosen rules up on it, the likelihood of eventual full-blown legalization should grow. By being the first or one of the first players into a given market, even if it’s for medicinal purposes instead of the larger recreational market, management can establish a foothold and successfully play the long game. This is likely why, throughout January, shares of Canopy exploded higher, rising 82.3% for the month.

Canopy is not the only one with a big month

Of the four companies covered here, Canopy undoubtedly had the busiest month, but it wasn’t alone. Another big boy, Aurora Cannabis (ACB), had some major news of its own. First and foremost, the company surprised investors when it pre-announced a preliminary range for revenue for the latest quarter (the first quarter containing recreational cannabis being legal in Canada). According to management, the firm generated between $50 million and $55 million in sales during that quarter, up from $11.7 million the same quarter a year earlier and above the $29.7 million seen a quarter earlier. In addition to this, though, the firm announced that, as of November of last year, it had achieved a rate of production of 70,000kg per annum. As of January of this year, however, that had increased to 100,000kg per annum and, according to management, the firm should reach 150,000kg per annum in this current quarter.

Outside of internal financials and general operations, though, Aurora also had some nice news on the M&A front. During the quarter, the firm announced its acquisition of Whistler Medical Marijuana Corp. for a price (cash and stock) of up to $175 million if certain contingencies are met. Whistler was actually one of the first 10 original licensed producers in Canada and was the first player to position itself as a premium provider by selling organic-certified products. Including a second new facility, Whistler should be capable of producing 5,000kg per year, it has been cash flow positive since 2015, and its EBITDA margin exceeds 30% according to Aurora. Assuming that it sells its product at the same weighted-average price and with the same sales mix as Aurora did in the quarter before its latest quarter’s results, the maximum price paid for Whistler appears to be around 10.5 times EBITDA, if not lower, on a forward basis, which is quite appealing.

The last development announced by Aurora during the quarter related to the firm’s 5.5% convertible notes due in 2024. I will not go into any real detail related to this, except to say that the gross proceeds of the transaction totaled $345 million, because I previously wrote an article about the flexible move made by management, that I recommend you read more about here. Collectively, all of these moves, combined with the general optimism centered around cannabis plays, helped to push shares of Aurora up 42.9% during January.

Two smaller plays

Canopy and Aurora saw big changes during January, but two other firms, HEXO Corp. (HEXO) and Tilray (TLRY), also saw some developments worth keeping an eye on. HEXO, according to a press release, began trading on the NYSE American, as opposed to only the Toronto Stock Exchange and as opposed to being on the OTC market. This occurred on January 23rd and management also announced a stock issuance to raise C$57.6 million, issuing 8.855 million shares of the business at a price of C$6.50 apiece. During the month, the units, traded on the TSX at least, saw their price appreciate by 57.2%.

Tilray, meanwhile, had two interesting moves that warrants mentioning. According to management, the company struck a deal with Authentic Brands Group, an owner of more than 50 brands sold through around 100,000 points of sale that generate in excess of $9 billion in revenue every year. Initially, Tilray will pay to Authentic an amount of $100 million (but this could increase to $250 million over time), but in exchange it will become its partner in all things cannabis-related, receiving 49% of net revenue generated by their venture. To help limit downside for Tilray should the deal not work out as hoped, Authentic has agreed to make minimum payments to Tilray of $10 million per year for the next 10 years no matter how their relationship works out. In addition to this, the company acquired all the stock of Natura Naturals Holdings Inc., the parent company of a licensed cannabis cultivation firm. This purchase includes the 662,000 square foot greenhouse facility it owns, which includes 155,000 square feet that is currently being licensed out. Initially, the firm will be paying to the buyer C$35 million in cash and stock, but this figure could double based on performance figures over time. Of the four firms covered in this article, Tilray experienced the least upside, with its share price climbing just 14.1% during the month.

Takeaway

Right now, there are a lot of big and exciting things happening in the cannabis space, and it’s important for investors to keep an eye out on all that is transpiring. To me, of the firms covered in this article, Canopy clearly saw the most momentum, but Aurora isn’t too far behind. Both of these firms warrant the most focus for growth-oriented investors who like this industry’s outlook, but the smaller developments by firms like HEXO and Tilray could also open up interesting doors for long-term prospects.

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.