OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 12/23/2022
Are Stock Buybacks Likely as a Holiday Treat?
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- With the MSOS ETF down 68% YTD vs. an 18% decline on the S&P, we decided to reexamine the potential for buybacks, recaps, or LBOs. With a recession of unknown magnitude bearing down on us, we don’t think these actions are prudent, but we wanted to let the numbers speak for themselves.
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- We started with a population of 62 non-financial cannabis-related companies in the Viridian Capital Advisors Value Tracker database with enterprise values over $20M.
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- For companies with analyst coverage, we used 2023 EBITDA estimates after applying a 10% discount. For non-covered companies, we used an annualized third-quarter EBITDA estimate. We estimated 43% tax rates on EBITDA for 280e-affected companies and 15% for companies not affected by 280e.
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- Supportable debt was calculated by dividing after-tax EBITDA by an assumed 1.5x coverage rate and then by the assumed interest rate of either 12% or 15%. This process produced debt/EBITDA ratios of 2.5x for 280e affected companies and 3.8x for non-affected companies, values which we believe to be quite conservative. We then subtracted existing debt to get an amount available to repurchase equity.
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- The graph shows potential buybacks as a percentage of market cap at either 15% interest rates (blue line) or 12% interest rates.
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- Only eleven companies have a buyback capacity at 15% rates, and only fourteen at 12%. Most have less than 20% market cap of excess debt capacity. Three companies stand out: C21 investments (CXXI: CSE), Vext Science (VEXT: CSE), and MariMed (MRMD: CSE) have the ability to repurchase over 40% of their outstanding shares.
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- Eliminating 280e would make a big difference, but share prices will likely expand more than debt capacity. We don’t see this as a near-term possibility, but Santa may still surprise with a shining new SAFE ACT under the tree. It is that or sugarplums for investors this year it appears.
