Curaleaf: Miss on Revenues But, $CURLF Continues Up to $27.00

Curaleaf $CURLF, reported its latest earnings.  The market was expecting slightly higher numbers for both revenue and earnings.  This miss, however, when you break down the charts, seems a bit misaligned with the success of what Curaleaf actually was able to print.  On the same day of its earnings release, Curaleaf also announced an acquisition of British medical cannabis EMMAC.

I wanted to thoroughly go through the revenues, margins, costs, and earnings, as well as the acquisition, to figure out what is next for $CURLF.  Lately, the cannabis market has eased off slightly from the recent highs.  Some may be on the sidelines wanting to get into a stock that is significantly outperforming the rest of the cannabis sector.

Here is a look at the chart on $CURLF, and then we’ll look in-depth at the financials:

Curaleaf CURLF stock chart
Curaleaf CURLF has been isolated from recent selling in the cannabis sector

Whereas in February there were significant price increases in the cannabis sector, $CURLF seems to have missed all of that.  Does the question now become what could be the next move for the cannabis sector as well as $CURLF?

Cannabis Stocks Are Going Up

Whenever I hear this I am a bit confounded.  It is too far of a generic statement to contain much validity.  Yes, there will be growth in cannabis.  Yes, some companies will see their stock prices rise because of this.  So, the question becomes, are you going to take a generic investment approach, or are you going to optimize your investment opportunity?  Time is money.  And, if you do not utilize your time wisely while cannabis stocks move, you could miss out on an amazing opportunity.

That being said, let’s address this very one statement: Cannabis is going up.

Adult-Use versus Medical

Whenever anyone does state that cannabis is going up, largely they are lumping themselves into the adult-use segment.  Medical cannabis has annual growth rate of 19% whereas adult-use cannabis will grow at 22.5%, CAGR.  Curaleaf appears to be capitalizing on these growth rates.

Here is the latest revenue for Curaleaf:

Curaleaf Revenues
Curaleaf Revenues are up significantly

Curaleaf’s revenue growth rate is outstanding compared to every other company out there.  While starting at a relatively same level, Canopy Growth $CGC, Aurora Cannabis $ACB, and Tilray $TRLY, are printing roughly 20% of these numbers at some $55M on a quarterly basis.

Mind you, this revenue growth was a miss when looked at what the market was looking for.  Management addressed this somewhat stating that revenues were suppressed because of harsh lockdown conditions throughout the country from the COVID pandemic.  Imagine what the revenue increase could have been had some states not been harshly locked down.  Also, there will be an increase in revenue from the acquisition of EMMAC when that completes.

I do want to point out that I do not think that EMMAC is likely to be profitable; they are still in VC stage of development, as you can see from this Pitchbook page:

EMMAC from Pitchbook

We will have to wait for a quarter or two to get a full idea as to how much EMMAC will add to the top and bottom line of Curaleaf’s financials.

Curaleaf’s Gross Margins

Curaleaf's Gross Margins Declined
Curaleaf’s gross margins have fallen from their higher levels

The past three quarters had Curaleaf’s gross margins printing about 65% on average.  The drop-down to 54.5% was attributed to costs associated with opening some of the new retail outlets.

To me, the drop in gross margins attributed to opening stores is an opportunity.  What I have found is that a cannabis company running a retail establishment usually has higher margins than a producer.  This seems natural if you think about it.  A retailer is purchasing its products at wholesale and these prices tend to be consistent, whereas a producer is dealing with far more variability and costs.

In the earnings release conference call, management stated that they brought in some 71% from retail operations whereas 29% came from their product sales from their own portfolio.  If Curaleaf can continually bring in 71% of its revenues with 65% gross margins with 29% coming in at 55%, this makes a big difference in the bottom line.  This is the difference of $142M versus the $125M printed in gross profits; a difference of $17M, or about 7.5% margin increase.

Operating Costs

Operating expenses did go upwards, whereas operating efficiencies remained flat.

Curaleaf Operating Costs
Curaleaf operating costs increased along with revenues

Basically, as revenues increased, so did operating costs.  Most of the gains, however, came from SG&A, not production.  SG&A moved upwards from $54M to $68M for the quarter, some $14M.

This kept operating efficiencies elevated somewhat, on a comparative basis:

Curaleaf Operating Efficiencies
Curaleaf Operating Efficiencies are modest

Curaleaf operating efficiencies are modest.  On a comparison basis, I have seen companies printing between 25% and 35% on efficiencies.  This extra 10% – 20% would be the difference of $25 – $50M in costs metric savings.

If you couple the cost metric savings, along with the increase in margins, all of a sudden you are looking at some $35M – $50M in additional profits to be added to the bottom line.

Curaleaf Net Income

Net income was -$35M for the quarter:

Curaleaf Net Income
Net income was affected by several factors

There was an attributable $16M in stock-based compensation that should not show up in the next quarter’s financials.  Take out the $16M and you are sitting at -$20M, an improvement.  With the improved margins, this would get Curaleaf to break-even.  Then, with more cost savings, all of a sudden Curaleaf is profitable.

$1.2B guidance and CURLF

Curaleaf is in the process of building a mega-company.  They are outpacing some of the giants in the industry and will become the go-to standard for the cannabis industry.

When I look at the headlines on this stock I do not see the misses that were made by analyst estimations.  Instead, I work out what CURLF could be trading at based upon their metrics.

Getting back to 64% margins is a matter of time as these retail establishments work towards normalcy.  Curaleaf is opening stores at a fast clip and on a regular basis; they now have 101 stores in 23 states.  But, they also have forward guidance, and that is what I want to look at.

With $1.2B – $1.3B in forward guidance, this is not much of a growth rate moving forward.  This is only a 20% increase from the current run rate.  Nonetheless, let’s break that down and sort out where this puts CURLF.

Future Gross Margins

If Curaleaf is able to increase its revenues that high, then we can assume that 71% of its revenue comes from the retail stores.  Margins from there should hit the 65% level again. That is $577M in gross profits with an additional $20M in gross profits from gross margins of 55% from manufacturing.  The total is ~$600M in gross profits.

At 45% in gross operating costs, this brings the total operating income to $330M.  Management has already guided that future earnings from interest income would return to the previous quarter’s results, which should be all of about -$10M.  This puts net incomes at ~$320M for the year.

There are 589M shares outstanding for CURLF.  This puts net income at approximately $0.54 per share.  with a 50x forward multiple, CURLF is a $27.00 stock; roughly a 90% increase from its current share price of $15.00 and this happens in the next year.

Getting to the $27.00 price means that Curaleaf has to turn around its margins, which there is a better than 50% chance of that.  Remember, they were already at 67% just last quarter and they had outliers from new store openings that drug margins downward.  I kept operating efficiencies at 45% simply because Curaleaf appears to be stuck there.  There is room for improvement and if cost metrics improve, this merely adds to the bottom line.

I believe that the $1.2B was modest.  Curaleaf has a much more rapid run-rate.  Curaleaf just printed $230M with an ~25% QoQ increase.  The $1.2B does not add too much in the way of an increase of revenues that they are already on.

Curaleaf Conclusion

Although the cannabis industry has been selling off somewhat, I can see this base-case scenario playing out handily for Curaleaf.  If $CURLF does dip, it will be on my radar for a buy.  I would think between $10.00 – $12.50 would be a solid buying opportunity for a 1-year run up to $27.00.

But, this will also be an opportunity for cannabis stocks to start separating themselves from one another.  Right now, most of the cannabis stocks move in concert.  If Curaleaf leads in a new direction then other companies may do the same and the separation from the good, bad, and ugly will begin.

I look for strong, continued leadership from Curaleaf.  This next year will solidify that.

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