Hallo Collective released its financials for Q4 2020. There were a few plusses and a few minuses. But, what I will be focusing on with this analysis is the future guidance and try and break down where $HCANF could be going over the longterm. The company did offer guidance of some $75M USD over the next year which is what investors have been waiting for. This is substantial growth relative to this year’s revenues. Even still, I want to know what Halo has potentially even further out, say 24 – 30 months.
For now, here is a look at $HCANF and the movement from the past couple of days after the financial release:
Largely, $HCANF was muted. I do not see that as necessarily a bad thing or a good thing. Instead, and to all of those who have messaged me in one form or another, ask one simple question: The US stock is trading at ~$0.08 per share. What future value do you get if you invest in this cannabis stock? I get. a lot of new investors coming by my site wondering how to invest and what they need to know to invest in stocks.
I’m going to break down the Halo Collective’s financial release and show you what is important to invest in stocks and cannabis stocks. Let’s look at revenues first.
Halo Collective Revenue
Call me silly, but when management announced record revenue growth for a few quarters in a few different sales channels, I actually thought this quarter’s results would also turn out to be record revenue growth. There were some 5 different news announcements on the website that stated “Record Revenue/Growth”:
That is a lot of announcements that mathematically should have led to revenue above the previous quarters. That did not happen.
When I saw the headline late on Wednesday night, I was a bit surprised. I had projected about $10M for the quarter so was looking for something about that number; it was half.
The good news is that Halo Collective has guided for FY2021 to $75M. My original projections were about $50M for the next year but, I also included this quarter’s numbers. So, for the next four quarters, one should expect to see a progressively increasing revenue picture. However, my expectations are that there will be significant gains upfront and then the growth rate will start to progressively get smaller and smaller. Still, revenue will be significantly larger in the next four quarters.
Halo Collective Future Outlook
In the MD&A, Halo Collective outlined 9 separate events that are going to unfold this year to get the company to the $75M level:
- Closing the acquisition of three operating stores in Alberta, Canada from High Tide Inc. in April 2021;
- Launch of Flowershop product and stores in California in May 2021;
- Opening the North Hollywood store in June 2021;
- Opening the two additional LA stores in West Hollywood and Westwood that were acquired on February 6, 2021, in June 2021;
- Revenues from harvesting at Bophelo in Lesotho, South Africa;
- Revenues from the acquisition of Nature’s Best Resources, LLC which the Company signed an agreement to acquire on March 26, 2021;
- Revenue contribution from Coastal Harvest, which was not in operation for most of 2020;
- Acceleration of MDT’s revenues following a new distribution and sales agreement with NMC Organization Inc, dba Greenstone Distribution (“Greenstone”); and,
- Closing down the joint venture with Just Quality LLC in Nevada to reduce operating expenses.
Over the past year, Halo has been on a massive spree to establish itself with a solid footprint in the cannabis industry. The list is a cumulative narrative of the past year’s efforts. But, it came with a price. On page 14 of the MD&A, the company shows the total weighted average of shares outstanding of 945M, up from 277M the year before:
Along with the future of Halo Collective, you also have to take into consideration how Halo will get to its future; it did some 30 transactions this year of issuing shares in exchange for acquiring a company or some other type of transaction. I have gotten a lot of questions regarding Halo’s share count, uplisting, reverse splits and a whole slew of other concerns regarding this issue.
On the one hand, Halo has issued a lot of issues; there is no one who could doubt that. On the other hand, those shares represent potential future growth. Last year’s revenues were all of about $21.5M. This year will be ~4x that amount.
Margins, Costs, & Net Profits
Normally, I put together an analysis based upon past numbers and make projections from them. Normally, as is the case with most cannabis stocks, I look at trajectories and make an estimation from these numbers. I like consistency. If a company consistently prints gross margins of, say, 60%, and they have printed those same numbers for several quarters consecutively, then I can reasonably assume that they will continue to that same number.
I cannot make any reasonable assumptions from Halo simply because the previous data is not inclusive of the future potential. Halo is taking on new assets. But, we do not know the entirety of the financial numbers on an individual basis.
So, I will put together margins, costs, and profits based upon industry norms. The only problem that Halo may have with my numbers is that I am not going to put together the numerical metrics immediately but instead will progressively get Halo’s numbers to where they could be.
This analysis is for 30 months out, or 10 quarters. I am considering the last four quarters and putting together a run-rate for that time period and the future stock price that could happen then. This means that my consideration is the final 12 months of 30 months out but this prices the stock in 18 months when the stock is looking at its future multiples.
Halo Collective Revenues
We already know a solid concept of where revenues will be in the next four quarters. But, what about beyond the first 12 months? We are told that the next 12 months will be $75M. My expectation is that this can double the year after that to an additional $75M, or $150M in one year’s time, and then the rate of growth will decline. I have seen this many times.
This is not to say that Halo will not continue with its expansion. But, I am considering only the assets that Halo has right now and the future projections of these assets. Halo could easily acquire additional companies along the way. Or, they could get acquired. That is not something I am considering today. So, for that remaining 12 month period of time, I am looking for revenues in the neighborhood of $35M, $45M, $55M, $65M for revenues.
Halo Collective Gross Margins
If you are just starting to figure out what it takes to invest in stocks, gross margins should be a very important indicator. This number is also known as the cost of goods. A company has revenues from all of the sales of its products. But, what were the costs of the items used in making the products? This is gross margins.
So, what are a competitive cost of goods on the revenues, or gross margins? Typically, the very best companies perform about 60% – 65% on gross margins. Halo has a solid mix of dispensaries (which typically get the better gross margins), branded products, wholesale, and diverse other mixes.
I am going to project the next 6 months with 50% gross margins. Then, the following 6 months with 55%, then the remaining 12 months with 60, and then finally, the last 6 months with 65% gross margins. After having scrutinized some 350 different cannabis companies, I can tell you that this is in line with a company that is ramping up. This means that the final 12 months will have an average gross margin of 62.5%.
Halo Collective Operating Efficiencies
A very important metric to understand if you are trying to develop your analytic skills to get better with how to invest is operating efficiencies. Operating efficiencies are the back-office costs involved in running the business, not necessarily the cost of goods. This may be the rent for the building or the CEO’s salary.
Halo Collective is already demonstrating cost containment with total operating costs. I believe they will continue this into the future. The very best companies that I have seen are generally running between 30% and 35%. I will split this for the operating efficiency metric and go with 32.5% when factoring this percentage.
Hallo Collective Continuing Operations
Continuing operations encompass interest expenses, other expenses, and taxation. This is the fourth mix of numbers in a financial statement. We are still in the early stages of investing in cannabis stocks so the numbers I see here can be all over the board. Typically, I use a 10% figure based on total revenue. This should be approximately $200M the last four quarters of the next 30 months.
Halo Collective Future Projection
Keep in mind, I am considering this projection for 30 months out and so the target for $HCANF should be in 18 months given the run rate. However, I may be conservative or I may be ultra-aggressive. As the quarters start to move forward I will adjust as I need to. But, given the potential of Halo and what I have seen with cannabis companies, for right now this is very plausible.
- $200M revenue
- 62.5% gross margins for $125M gross profits
- 32.5% total operating costs for $65M operating profits
- 10% continuing ops for $20M net profits
- 1,000M shares outstanding for $0.045 EPS
- 65x future earnings multiple $2.90 per share
Keep in mind this stock projection begins at 18 months out and represents the future run rate of the next 12 months thereafter. I am using a modest future earnings projection based upon my past projections. I usually use 100x future earnings. But, the revenue run rate will start to decline 18 months out. Because of that, I am throttling back the future projection.
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