Curaleaf, Truelive, Verano could benefit from marijuana reclassification

By Steve Gelsi

Alliance Global Partners says cannabis businesses will get a boost, while a Bernstein analyst hikes price targets for Canadian names

Multi-state cannabis operators Curalef Holdings Inc., Trulieve Cannabis Corp. and Verano Holdings Corp. will get a boost if the U.S. reclassifies cannabis as a Schedule III drug from its current Schedule I status, Alliance Global Partners analyst Aaron Grey said Tuesday.

The Drug Enforcement Administration is mulling a recommendation from the U.S. Department of Health and Human Services (HHS) to lower cannabis to Schedule I, where it now resides with the likes of LSD and heroin, meaning that it has no medical benefits under federal law.

A decision is expected by the end of 2024.

HHS recommended in August that cannabis should be re-classified as Schedule III, which recognizes the medical applications of a drug and typically requires regulation by the Food and Drug Administration.

The subsequent release of a 250-page document containing the findings of the HHS recommendation sparked a rally in cannabis stocks a couple of weeks ago.

Also read: Green Thumb, Trulieve and other cannabis stocks up as much as 23% as details emerge on HHS recommendation to lower drug classification

Also read: HHS recommends rescheduling cannabis, and stocks in the sector rally

Most legal experts agree that lowering cannabis to Schedule III would mean that the 280E tax law passed during the Drug Wars of the 1980s would no longer apply to state-legal marijuana companies.

The 280E measure prevents cannabis companies from taking standard business-tax exemptions for expenses such as cost of goods sold, and other major deductions. It significantly raises the cost of doing business for the sector.

Alliance Global Partners analyst Grey said Tuesday that Curaleaf (CURLF) would get the largest benefit of $130 million to $155 million if the 280E ban on tax deductions goes away, followed by $115 million to $135 million for Trulieve (TCNNF) and $90 million to $110 million for Verano (VRNOF.)

Grey also projected a $50 million to $70 million benefit for Cresco Labs Inc. (CRLBF), a $55 million to $70 million benefit to Green Thumb Industries Inc. (GTBIF) and a $35 million to $50 million benefit for Cannabist Co. Holdings Inc. (CBSTF)

"All in, we now look for rescheduling to Schedule III to provide meaningful cash flow benefits (up to $150M plus) to be used to de-risk balance sheets, capital expenditures, or mergers and acquisitions," he said.

Currently, the largest U.S. cannabis companies trade at a roughly 45% discount to high-growth retail consumer packaged goods companies, he said. Cannabis stocks could narrow that valuation gap if 280E goes away.

Nadine Sarwat, a cannabis analyst with Bernstein, said the U.S. legal marijuana industry faces "more questions than answers" on a potential move to lower the classification of pot to Schedule III.

"And while rescheduling would be monumental, it's not what many cannabis producers and investors would prefer (i.e. a full de-scheduling and commercial model akin to alcohol)," she said in a research note on Tuesday.

Meanwhile, Sarwat said the Canadian market continues to improve for cannabis operators, with volume up 16% year-over-year. Pricing has come down by 5% over the same period, but it's improving, she said.

"Demand for legal products continues to rise from both (i) illegal spending on cannabis shifting over to legal products, and (ii) new consumers entering the sector altogether," Sarwat said.

Bernstein hiked her price target for Canopy Growth Corp. (CGC) to $5 from $1.10, and cut her target price for Tilray Brands Inc. (TLRY) to $2.20 from $2.90 a share, and reiterated market-perform ratings on both of them.

She also reiterated a market-perform rating on Cronos Group Inc. (CRON) and set a price target of $2.10 a share.

Also read: MedMen goes from height of $3 billion valuation to zero as stock draws cease-trade order and top execs leave

-Steve Gelsi

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01-30-24 1409ET

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