Company Reports

Shares of Canadian-licensed producers and US multistate operators rallied massively on news that the US Drug Enforcement Administration will proceed with rescheduling cannabis to Schedule III from Schedule I. Schedule I indicates it is considered to have a high potential for abuse and no medical value. In comparison, Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. We view the April 30 news as the next step in a long process by the Biden administration to relax the current federal prohibition. We view the market reaction as a reflection of how much pressure these stocks have faced rather than any new development.

Curaleaf cultivates and sells cannabis in the US with a presence in 17 states. Vertically integrated, Curaleaf produces through 21 cultivation sites and sells directly through 147 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf has generally employed a more aggressive growth strategy, which hasn't always paid off, leading to exits and sales.

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.

No-moat Curaleaf reported fourth-quarter sequential net revenue growth of 4% compared with 1% in the third quarter. Moreover, its adjusted EBITDA margin reached 24%, a slight improvement from third quarter’s 23% mark. Full-year revenue of $1.34 billion was within our expectations. Still, profitability was better than we expected as its 23% adjusted EBITDA margin was a few hundred basis points higher than we forecast. For 2024, Curaleaf expects mid-single-digit top-line growth and a mid-20% adjusted EBITDA margin. Compared with our existing forecast, this sales growth outlook is slightly lower, but this margin outlook is slightly higher. We expect our forecast changes to offset, leading to minimal changes in our per-share $13/CAD 18 fair value estimates.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 18 states. Vertically integrated, Curaleaf produces through 21 cultivation sites and sells directly through 146 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf has generally employed a more aggressive growth strategy, which hasn't always paid off, leading to exits and sales.

No-moat Curaleaf’s third-quarter results reflected continued weakness in the top line, with net revenue up just 1% sequentially, and adjusted EBITDA margin remained low at 21% compared with 26% a year ago. We’re likely to trim our $17/CAD 23 fair value estimate by a few dollars to reflect the stubborn top-line weakness.

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.

We were disappointed by no-moat Curaleaf’s second-quarter results, which included meager sales growth and a sizable margin contraction. Thus, we have reduced our fair value estimates to $17 and CAD 23 per share, down from $20 and CAD 27, respectively. Even so, shares are very undervalued even after considering our Very High Uncertainty Rating for Curaleaf. We think the market remains overly focused on the lack of progress concerning the potential easing of federal prohibition and mistake slower-than-expected growth as signs that the overall market potential has changed. In short, after the massive expectations priced in a few years ago, we now think investors have swung too far the other way. But, like growing a plant from seed to harvest, an investment in cannabis might require some patience.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 19 states. Vertically integrated, Curaleaf produces through its own cultivation sites and sells directly through 152 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf generally employs a more aggressive growth strategy.

No-moat Curaleaf announced first-quarter results with few surprises. Revenue declined about 2.5% sequentially, in line with the pressure from the stubborn illicit market. On the positive side, management’s shifted focus to profitability led adjusted EBITDA margins to expand to 22% from 20% in the fourth quarter. Looking to the rest of the year, Curaleaf maintained its guidance for full-year revenue growth of low- to mid-single digits and adjusted EBITDA margins in the mid-20% range. In comparison, we forecast top line growth of 5% and margin of 23%. We’ve maintained our fair value estimates of $20 and CAD 27 per share.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 19 states. Vertically integrated, Curaleaf produces through its own cultivation sites and sells directly through 152 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf generally employs a more aggressive growth strategy.

No-moat Curaleaf finally released fourth-quarter 2022 results on May 1 after a delay stemming from its conversion from IFRS to GAAP accounting standards. Fourth-quarter revenue reflected the ongoing challenges of selling legal cannabis in the current U.S. economic environment, with revenue growing just 4% sequentially. In comparison, full-year revenue growth was 12%. Also, profitability retreated, with adjusted EBITDA margin declining to 21% compared to 25% in the third quarter.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 19 states. Vertically integrated, Curaleaf produces through its own cultivation sites and sells directly through 152 dispensaries and wholesale to other dispensaries. Compared with other multistate operators, Curaleaf generally employs a more aggressive growth strategy.

On April 13, the New Jersey Cannabis Regulatory Commission’s board denied renewal of Curaleaf’s cultivation and retail licenses for adult-use cannabis. Two adult-use dispensaries may need to halt sales by April 21, though a third dispensary that opened more recently and Curaleaf’s medical licenses are unaffected. The company gained access to the state’s legal recreational market when it opened in April 2022 and has since grown its cultivation and retail footprint in the state. The board’s ruling was a surprise to us, as it went against the commission’s own executive director’s recommendation and was the only renewal applicant to be denied. The market was surprised, with shares down over 7% on Friday, April 14.

Curaleaf’s fourth-quarter and full-year 2022 earnings release was originally set for March 28. On March 24, the company announced a delay until some date in April, yet to be announced. The company cited complexities with converting to U.S. GAAP from IFRS reporting standards as the main reason for the delay.

Curaleaf delivered weaker third-quarter results that reflected the current U.S. economic environment. Revenue grew 1% sequentially (compared with 8% in the second quarter) as support from new store openings and strength in core markets was offset by inflation hitting customers' wallets. Additional one-time drags included store closures in Florida during Hurricane Ian in late September. Offsetting some of the revenue weakness, adjusted EBITDA margin contracted only about 80 basis points sequentially to 25%. Our forecast isn’t materially changed, so we maintain our U.S. dollar-denominated $25 fair value estimate for the no-moat firm and raise our Canadian dollar fair value estimate to CAD 34 from CAD 32 on a stronger U.S. currency.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 22 states. Unlike the Canadian cannabis producers, Curaleaf is much more vertically integrated with 26 cultivation sites and 142 dispensaries. It gives investors full exposure to the U.S. cannabis market, the fastest-growing and largest potential market. Compared with other multistate operators, Curaleaf employs a more aggressive growth strategy, entering states flush with competitors.

President Joe Biden’s comments on cannabis legalization spurred a rally in the cannabis sector on Oct. 6. His major announcement was that all prior federal offenses of simple marijuana possession will be pardoned. The act is expected to affect approximately 6,500 people convicted from 1992 to 2021. Additionally, Biden called upon governors to take similar action toward pardoning possession offenses. More importantly for the legal cannabis industry, he plans to direct the Department of Health and Human Services and attorney general to review the product’s status as a Schedule 1 controlled substance, which places it among heroin and LSD and higher than methamphetamine and fentanyl.

Any inflationary cost pressure seems to be in Curaleaf’s rearview mirror, as second-quarter revenue grew 8% sequentially to $338 million and adjusted EBITDA margin expanded 220 basis points to 25.6%. In comparison, first-quarter revenue declined 2% sequentially and adjusted EBITDA margin contracted 150 basis points.

Curaleaf cultivates and sells cannabis in the U.S. with a presence in 22 states. Unlike the Canadian cannabis producers, Curaleaf is much more vertically integrated with 26 cultivation sites and 136 dispensaries. It gives investors full exposure to the U.S. cannabis market, the fastest growing and largest potential market. Compared with other multistate operators, Curaleaf employs a more aggressive growth strategy, entering states flush with competitors.