Indus Holdings purchased Lowell Herbs in a mostly stock deal. The combined companies are set to launch their new branding. $LOWLF is very attractive to me for a number of reasons – its upside potential being the main driving force. This is a stock that is a buy-and-hold. They will get there from a multitude of angles. They have a tremendous social presence of some 1M impressions per month. They also have capabilities of some $105M annually – although, I have calculated a number slightly higher.
I am going to break down the current figures for Lowell. Then, I’m going to show the projections as to how Lowell gets to where the stock price will be some $31.50 from its current price of ~$1.50 per share.
Breaking Down Lowell Farms
First, I am a Californian. I have lived in California since 1990. I am currently living abroad and am actually moving back to Puerto Vallarta, Mexico over the next two months time. Because I am a Californian, I know a lot of people from there. I have had more than one individual try Lowell products and direct my attention to them. They all said the same thing: “some of the best stuff they’ve ever had”. That’s a tall order. But, since I only partake in the financial statements of a cannabis company, I do not have a reference point.
Knowing what I have learned about cannabis I know that outdoor grow farms produce a more preferred product. Lowell is just outside of Monterrey California in Salinas. This is optimal growing land. THC levels have come in between mid 20% to low 30% levels. That is on the higher side which is why everyone enjoys the products so much.
Also, Lowell’s social presence is tremendous:
This is momentum you simply cannot buy. The name-brand recognition is going to be a huge factor in driving revenues upwards. This many individuals who will become potential customers once all of the production capabilities are in full gear will drive revenues upwards.
Lowell Farms Revenues
Lowell Farms has production capabilities of about 65k – 75k lbs. annually. That equates to about $105M in annual revenue. However, I think the company lowballed that. In the state of California, wholesale prices for a pound of cannabis is $3,400.00. At an average of 70k annually, that amounts to $235M.
Because of the large disparity, I will go with the company’s projections of $105M in annual revenue with an eye towards the potential of far more capacity.
Lowell Farms Current Revenues
For now, revenues are just getting there:
Revenues were suppressed over the past two quarters due to wildfires. Nonetheless, Lowell Farms is on its way towards achieving its future revenues. Its current run-rate is approximately $50M, if not more.
I am looking for ~$70m – $80M this year in total revenues. I feel this is achievable simply because wildfires will not be a factor again. After all, once a forest burns, it does not have the ability to burn again until it grows back. That may take some 25 years.
What is necessary next is the economies-of-scale necessary to push profitability.
Lowell Farms Gross Margins
The very best producers in the cannabis industry are producing ~60% gross margins. But, with Lowell, they may easily exceed 65% in total simply because they are an outdoor grow facility, nurseries notwithstanding. Should Lowell achieve $75M this year in revenues, the potential is ~$45M – ~$50M in gross profits. Should they eventually get to $100M, they could exceed $65M in gross profits.
Lowell Farms Operating Efficiencies
One-off factors contributed negatively to cost structures, pushing up operating costs:
Again, the fires are to blame and these one-offs, should they be perceived negatively in the markets by someone not digging deep enough, or looking far enough into the future, will be an opportunity.
I will continue to use the 35% level as operating efficiencies but will adjust downward towards 30% for future operating costs simply because of the potential to drive costs down continuously along with economies-of-scale. This could mean total operating costs of $26.5M off this year’s $75M projection along with $35M off of $100M.
Lowell Farms Net Income
First, one thing to point out is, well, two things. There was all of about $7M cash on hand in the latest earnings report. But, Lowell priced some CAD 30M in a stock offering. This is factored into my calculations for total shares outstanding which was adjusted on March 2nd. So, Lowell has plenty of cash on hand for the next year. This prevents any further diluting.
Last quarter, Lowell printed positive net earnings. However, and again due to the fires, Lowell was not able to achieve this metric. I look for more net earnings positive in future quarters.
The pace for costs due to continuing operations is about 5% for now for Lowell. Given that, we can factor the total valuation for the company;
- $105M revenue
- $68.2M in gross profits from 65% gross margins
- $31.5M in operating costs from 30% operating costs
- $15.25 in continuing costs at 15% of $105M
- Net earnings would be ~$20M
- There are some 32M shares outstanding
- EPS is then $0.625 per share
- 50x future earnings multiple is $31.25
$LOWLF is currently trading at ~$1.50 per share.
I usually use 100x future earnings multiple with cannabis stocks since the industry is growing as rapidly as it is. So, $31.25 is ultra-conservative
Addressing Downside Risks
The downside risk to this is first, the total value of the stock, which is trading at $1.50 per share. I am thinking this stock could ease off from its recent highs and we may see a print of $1.00, $0.80, and all the way down to $0.60 per share. At these levels, this is a strong buy as the fundamentals support the company’s success.
I feel fairly certain that Lowell can achieve the $105M in cannabis sales over the course of the coming years. The Californian Cannabis industry is currently $4B annually. I believe it will go to $15B in the next 5 – 7 years, and Lowell will lead that. There is, after all, its social media presence.
Then, there are margins. Achieving 65% is not too far of a stretch simply because they are a predominantly outdoor grow facility in a part of the state that is revered for growing quality products such as wine and cannabis.
Costs will return to better metrics now that the wildfires are behind them. I believe they can easily achieve 35% once again, if not the better metric of 30%.
So, I feel quite strongly about this particular stock and its upside potential.
I am calling for $LOWLF at $31.25 within 2.5 year’s time.
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