Cannabis Companies Ranked by Debt-to-Equity Ratio

Matthew Carr By Matthew Carr
Chief Trends Strategist

Beyond the Bong
This is individual research and does not constitute investment advice.

Even though the legal cannabis industry is still quite young, it amazes me how much bias already exists.

Last week, Tilray (Nasdaq: TLRY) reported fourth quarter earnings.

For 2018, revenue jumped 110% to $43.1 million. And a sizable chunk of that came in the fourth quarter, when revenue leapt 204% to $15.5 million.

As I ran on the treadmill premarket, the analysts kept saying, “Tilray shares are surging!” “Tilray shares skyrocket as revenue jumps 200%!”

In fact, they were up only 2% in premarket trading. That’s far from a “surge”…

Now, they did jump at the open, hitting $75.55 – a 4.6% gain from their previous close of $72.24. But then shares began sliding… and have struggled since.

The culprits are what we so often talk about here: losses and gross margins.

Everyone knows revenue is going to jump triple digits. So the real metric to zero in on is profitability.

Tilray’s net loss ballooned from $0.10 to $0.82 for the year. And even though average selling price per gram increased to $6.61 as extracts accounted for 49% of the sales mix, gross margins collapsed from 57% to 20%.

Ouch.

Because Tilray’s capacity is strained at the moment, it’s had to rely on third-party supply. That gutted margins.

A similar problem impacted The Green Organic Dutchman (OTC: TGODF) on its earnings. Net loss increased for the year from CA$0.12 to CA$0.21. The company also saw a loss from operations of CA$18.1 million as it ramped up commercial production.

These negative results sparked a sell-off.

Though shares of Green Organic Dutchman have still had a stellar 2019. Despite the more than 12% pullback following earnings, they’re up roughly 95% year to date.

In other news…

The Secure and Fair Enforcement (SAFE) Banking Act will receive its first congressional committee markup this week. Tomorrow at 2 p.m. ET, investors can tune in here to watch the House Financial Services Committee meeting live.

The markup is a momentous step for the cannabis industry. It’s the first time an industry banking bill has made it this far.

Then, with the race to infuse everything with CBD, Jelly Belly founder David Klein announced a new company, Spectrum Confections. The company will offer gourmet jelly beans infused with 10 milligrams of CBD.

And finally, shares of Curaleaf Holdings (OTC: CURLF) really did surge last week – gaining 36% over two days – after CVS Health (NYSE: CVS) announced a distribution deal with the CBD maker.

Some of you may remember that Curaleaf was our No. 1 pot stock to watch in last week’s High Five. It also reported fourth quarter revenue shot up 407% to $32 million. Though its net loss swelled from $0.00 to $0.04.

Speaking of Curaleaf, the company makes an appearance in this week’s Making the Grade…

Making the Grade

We all know tremendous growth is underway in the cannabis industry. But that growth comes at a cost.

This week, my team and I looked at debt. Specifically, we looked at which companies were the most burdened according to debt-to-equity.

This gives us insight into who’s using funds and who’s relying on debt to fund their operations.

Now, the average debt-to-equity ratio for the industry is 8.03. And there were plenty of companies well below that level. But here are the top 10 that weren’t…

Terranueva (CSE: TEQ) led the pack with a blistering 110.19.

Second on the list was Curaleaf at 84.19, followed by Wildflower Brands (OTC: WLDFF) and Zenabis Global (OTC: ZBISF).

As you can see, the ratio drops down pretty rapidly. And there were only 15 companies that had debt-to-equity ratios above 20.

That means a lot of cannabis companies are working to keep their liabilities in check.

The High Five

1) Cronos Group (Nasdaq: CRON) will report fourth quarter results tomorrow before the market opens. On paper, tobacco company Altria Group (NYSE: MO) has already doubled its $1.8 billion investment for a 45% stake in Cronos. It owns 223.8 million shares and, with shares above $20, that stake is worth more than $4 billion.

2) CannTrust Holdings (NYSE: CTST) is another Canadian producer we’ve covered many times in the past, including last week… but with good reason. There’s a lot to like about the cannabis oil company with infused beverages and edibles on the way.

With its recent uplisting to the New York Stock Exchange, its fourth quarter earnings report on Thursday before the opening bell is a must-watch.

3) Cresco Labs (OTC: CRLBF) just dropped $120 million to buy Florida medical marijuana company VidaCann. This will give Cresco access to 65% of the total addressable market and as many as 30 medical dispensaries in the state.

VidaCann is projected to have 20 dispensaries operating in Florida by the end of the year. And the company is locating them so that 95% of the state’s population is within 50 miles of a VidaCann dispensary. In last week’s High Five, we also highlighted Trulieve (OTC: TCNNF), the largest operator in Florida. So this market is really heating up.

4) CV Sciences (OTC: CVSI) reported earlier this month that 2018 revenue increased 133% to $48.2 million. Net income was a record $10 million, or $0.09 per share.

A reader asked about CV Sciences in the comments section. I’ve been covering the company for over a year, and I think it’s in a very strong position. Shares are moving higher along with Curaleaf and the rise of CBD.

Revenue is projected to jump 68% this year to $81.1 million. It’s also appeared many times in Making the Grade for all the right reasons.

5) New Age Beverages Corp. (Nasdaq: NBEV) was another company readers asked about. The infused beverage maker will report earnings on Friday before the opening bell. Expectations are for $13.54 million in revenue with its loss narrowing from $0.16 to $0.04. The CBD-infused beverage space is projected to increase from $89 million to $1.4 billion by 2024.

Late last year, New Age shares got overheated with all the speculation that Coca-Cola (NYSE: KO) and PepsiCo (Nasdaq: PEP) would enter the space. I didn’t believe it then, and New Age shares – among others – collapsed when the two beverage giants said they were not interested… at least not yet. Now I think New Age can move forward on its own merits.

Year to date, the majority of this week’s High Five have performed extremely well…

Even though Cresco Labs and CV Sciences have underperformed the Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), they’ve still gained more than 34%. Only New Age Beverages is really lagging at this point.

For the week ahead, all eyes are going to be on Cronos’ and CannTrust’s earnings. Those are going to be market movers.

Not to mention, the SAFE Banking Act heading to committee for markup is a historic moment. This means it could move to debate, although it’s up in the air whether the Senate will ever approve the bill.

Nonetheless, be ready for another week of big moves!

Good investing,

Matthew