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 11/11/2022
Are We Close to the Bottom for 2023 EBITDA Estimates?
- The graph shows 2023 EBITDA consensus estimate revisions since 9/1/22 for 18 cannabis companies. The chart decomposes 2023 EBITDA revisions into the portion attributable to lower revenues (blue bars) and the portion attributable to lower EBITDA margins (red bar). Estimate cuts range from a reduction of over 50% for Lowell Farms (LOWL: CSE) to a drop of only 6.9% for Cresco (CL: CSE).
- Over the last few months, we have been saying that we did not believe analysts had sufficiently factored in margin pressures from commoditization and inflation. The chart bears out our theory. 4Front (FFNT: CSE) is the only company with positive EBITDA margin revisions, and half of the companies had more significant EBITDA declines from margin reductions than revenue reductions. Year to date, analysts have cut 2023 revenue and EBITDA estimates for the group by 29% and 44%, respectively.
- 2022 has been a problematic year operationally for cannabis companies. Wholesale prices have fallen sharply in nearly every mature market, preventing inflationary cost increases from being passed on. New York, the most highly anticipated recreational market opening, has been delayed repeatedly. California, which seemed briefly to be turning around, has instead continued to sink. Moreover, a true test of the recession/inflation resistance of the industry is at hand. Already, basket sizes have been coming down in multiple markets as pressured consumers trade down to lower priced products.
- Still, the picture is not all bleak. New Jersey has been a resounding success, and two big markets, Maryland and Missouri, legalized in the midterm election. Illinois sales are up 16% yoy ahead of new licenses coming online, and New York may yet get its act together. Additionally, many industry watchers believe a divided legislature is ideal for passing SAFE+ legislation.
- Despite these positives and our bullishness on equity prices, we are cautious about industry profitability. Companies that are well positioned for the opening of new markets enjoy outsized profitability until cultivation capacity catches up to retail demand and wholesale prices begin to fall. With no 280e relief or federal legalization on the horizon, success will increasingly mean tight expense control and careful capital budgeting. We will be updating our liquidity analysis as earnings season finishes this week.
