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 08/28/2023
Viridian Capital Chart of the Week: How Capital Intensive is Cannabis?
- The chart explores the capital intensity of cannabis compared to four other industries thought to be likely suitors for cannabis companies upon federal legalization: Tobacco, Alcoholic Beverages, Pharmaceuticals, and Consumer Products.
- In the chart, the cannabis group comprises the nine MSOs with market caps over $100M.
- Tobacco includes British American Tobacco (BTI: NYSE), Altria (MO: NYSE), Phillip Morris International (PM: NYSE), and Japan Tobacco (JAPAF: NYSE).
- Alcoholic Beverages include ABEV (ABEV: NYSE), Brown-Forman (BF.B: NYSE), Constellation Brands (STZ.B: NYSE), Diageo (DEO: NYSE), and Molson Coors (TAP: NYSE).
- Pharmaceuticals include Johnson & Johnson (JNJ: NYSE), Pfizer (PFE: NYSE), Merck & CO. (MRK: NYSE), and Eli Lilly (LLY: NYSE).
- Consumer Products include Colgate Palmolive (CL: NYSE), Mondeles (MDLZ: NYSE), Proctor & Gamble (PG: NYSE), and Unilever (UL: NYSE).
- The capital intensity of each group (depicted by the green bar) is measured by its aggregate next twelve-month consensus revenue estimates divided by aggregate capital employed (book equity + total debt –cash). The lower the bar, the more capital the industry requires to generate $1 in sales.
- The chart shows that cannabis is the most capital-intensive of the industries shown.
- NYU professor Aswath Damodaran publishes an annual study of approximately 7,000 companies in 94 industries, and only 16 of the 94 industries are more capital-intensive than cannabis. (Damodaran does not include cannabis in his studied industries.) https://pages.stern.nyu.edu/~adamodar/New_Home_Page/dataarchived.html
- Cannabis capital intensity is related to federal illegality. Cannabis companies must cultivate cannabis in each state where they sell the product, an economically inefficient practice. Post-legalization, we would expect a more centralized or at least regionalized structure to develop. Similarly, cannabis companies are forced to maintain duplicate managerial and operations functions that would be eliminated in an interstate commerce environment.
- Like 280e, excess capital intensity is an economic burden imposed on cannabis, the removal of which we expect to improve cannabis economics and cash flow- eventually.
