TILT Holdings Inc (TLLTF)

[FUNMAN]

(See RED) Headwinds Threaten Cannabis Industry as Earnings Roll Out
As many in industry struggle, we preview reports to come.

By DEBRA BORCHARDT
Feb 21, 2020 | 02:29 PM EST

https://realmoney.thestreet.com/investing/stocks/earnings-preview-as-cannabis-companies-face-headwinds-15246161


The National Cannabis Industry Association held its first cannabis business conference in Boston this week. Front and center was the conversation that many companies in the industry are struggling. Vendors complained about companies not paying bills and interested investors were opting to remain on the sidelines.

One private equity fund manager said he didn't expect any movement in cannabis stocks for at least six months. He added that the days of cash deals were over. It's definitely buyers' market, now.

Still, there were many who voiced optimism about the industry. Another fund manager noted that the mainstream bankers had quickly vacated the space when they learned it wasn't going to be easy money. This was elevating their importance in the industry as they had been there in the beginning and weren't abandoning the group.

This opportunism was voiced elsewhere as well. Companies willing to provide services at lower prices had picked up the business from other companies that weren't willing to make price adjustments. Many feel that once the sales numbers for Michigan and Illinois begin to be reflected in quarterly earnings, the stocks will respond and buyers will come back to the table.

Earnings Season

Cannabis companies will begin reporting earnings and Canaccord Genuity released its preview for the companies analyst Bobby Burleson covers. He said he is continuing to look for clarity on vape demand following last year's crisis. All of his names are rated as a Speculative Buy, except of Mjardin (MJARF) , which receives a Hold rating. All figures following are in Canadian dollars.

Ayr Strategies (AYRSF) will kick off the season as it delivers it numbers on Thursday. Burleson has not changed his estimates for $34 million for fourth quarter revenue and $76 million for the full year. This company has a target price $25 and was lately trading at $11. The company received final approval from Massachusetts state regulators to start its operations at its newly expanded facility and the company said it plans to complete an initial harvest this quarter with wholesale sales expected to contribute to second quarter results.

"We continue to believe the enhanced production capacity will allow AYR to expand upon its leading position as a Massachusetts wholesaler to the recreational market," said the analyst. Burleson thinks that licenses awarded to social equity applicants will drive a demand in the wholesale market.

The analyst has a 60 cent price target on 1933 Industries (TGIFF) and it was lately selling for 18 cents a share. He thinks that new cultivation assets in California and Nevada will mean strong sequential growth in revenues. His estimates for the quarter are $3.8 million in revenue and that is unchanged.

"Moving beyond the quarter, we continue to anticipate revenue growth to be driven by the expansion of TGIF's portfolio of branded products in both the AMA cannabis and Canna Hemp CBD segments of the business and as new licensing partnerships bear fruit," wrote Burleson.

Indus Holdings (INDXF) is focused on cultivation expansion, which is expected to multiply by three times from 11,000 pounds in 2019 to 30,000 pounds in 2020. Burleson did note that while the company is well positioned to hit his estimates, Indus has a limited cash position. Capital is extremely tight these days in the cannabis industry, so this could become a real problem. But unlike other cannabis companies, Indus' debt is low and if the company has to do a capital raise, that might bring comfort to investors. The company has a long way to go to hit Burleson's price target of $4, since it is only trading at 71 cents per share.

Planet 13 (PLNHF) has continued to surprise the market with its strong sales in typically slow Las Vegas winter months. December saw record traffic, albeit with a little help from the MJ Biz conference that month and January managed to beat its previous numbers. The company is planning to roll out a wholesale operation in Nevada and open a new store in California. Burleson's estimates are unchanged for Planet 13, but he hasn't added any figures for California. If that dispensary is opened, he thinks it could be reflected late in the second quarter or early in the third quarter. The company could also use some of that cash flow from Vegas for additional acquisitions or expansion into Illinois, Massachusetts or Michigan. The price target is $4 and the stock was lately selling at $2.50 a share.

Burleson cut his estimates for Plus Products (PLPRF) last month by $1 million as the company changed its distributor relationship and lost sales. Still, though he thinks in the long run, the distributor change will pay off with a larger footprint for California and cut the cost of product placement fees for shelf space. The company's gummy products remain a customer favorite keeping it at the top of many sales lists. "We believe in growth this year and in 2021 will be driven by the enhanced distribution of products in California and initial meaningful sales contributions from Nevada operations and CBD sales beyond the company's own ecommerce platform," he wrote. Plus Products stock was selling at $1.06 per share and the analyst's target price is $4.

Estimates were cut recently for TILT Holdings (TLLTF) as the company faced headwinds on the vape front and delays in the Massachusetts market. These concerns continue to linger.

Burleson's outlook on Slang Worldwide (SLGWF) is dependent upon the company making an acquisition announcement that would continue the company's efforts to expand beyond vaping products. Before the crisis, Slang was a big consumer favorite, but since then all vape sales have dropped. Slang has quickly pivoted during the crisis to create a new line of district edibles and signed an agreement to bring the cookies brand into Oregon. The Tilt target price is $1.25 and the stock is currently selling at 31 cents per share.

MJardin, the only hold-rated stock, is dependent upon cost cutting measures and capacity expansion initiatives. Burleson calls 2020 an "execution year" for the company. His target price is 24 cents and the stock was lately trading at 15 cents.

Burleson said he is also keeping his attention focused on continuing capital needs for these companies. While capital has been tight, it isn't non-existent. Viridian Capital Advisors said that capital raise activity recorded another strong week for the period ending Friday.

"We recorded 14 closed transactions raising an aggregate of $236.1 million vs.12 transactions raising an aggregate of $208.2 million in the year-earlier period. Publicly traded companies represented 10 of the 14 capital raises, continuing a multi-year theme," the wrote in a recent newsletter. That certainly sparks hopes for the companies needing more money to get through the tough times.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.