For some time I have wanted to look at AYR Wellness stock $AYRWF. The company’s financial data is not reported as most and sometimes there are missing pieces. Nonetheless, there is practical guidance given by management in the recent investor presentation. Guidance is for $360M in revenue with ~30% EBITDA profit. These are significant numbers; they include three recent acquisitions being accretive as the new revenues work their way into the fold. I have viewed many companies with approximately the same revenue. The 30% is about on par with some solid performers, but not the very best. I have been able to coax out some metrics such as gross margins; roughly 57.5%. Again, a solid number, but not the very best.
There is one metric out of all of these that makes everything not just impressive but, standout impressive: Shares outstanding. AYR Wellness has about 47M shares outstanding pre-acquisition of Liberty. With Liberty, there will be an additional 17M shares. There should be an additional 2M – 5M shares. This brings the total to about 70M shares outstanding. When you break down the revenue and profit potential and spread it out over a mere 70M shares outstanding you get a solid sense that the company is significantly undervalued.
While I do not have a lot of data going back many years – as I normally do – I am breaking down the future projection to show what a potential valuation would be for AYR Wellness.
AYR has been moving upwards since the latest earnings release. My expectation is that there is a solid move upwards that will occur.
As I mentioned, I do not have the normal amount of financial data to show for AYR. Instead, I am going to break down the future revenue and potential earnings for this year.
At $360M in total revenue, this represents a sharp increase over where current revenue levels are. However, Liberty Health will be adding in revenue and earnings starting this quarter. Then, the Ohio, Arizona, and New Jersey deals will be adding in to revenues over the next two quarters. So, these revenue projections are inclusive of recent acquisitions.
But, I have seen AZ numbers coming through recently. Sales numbers for the state, which recently pushed higher than expected. Given this, I am wondering how much potential there is for an upside surprise in revenues coming from certain areas of AYR’s businesses.
So far, AYR printed $58M for Q1. Expectations are for $90M in Q2. If this hits, then the following two quarters should be in line for a combined $220M. With the 30% margin rate, guidance was for $108M in EBITDA profits.
Earnings Per Share
At a rate of approximately 11% of revenue, this puts net earnings potential at ~$60M. There are some 70M shares outstanding with AYR given the recent acquisitions. This is an EPS of $0.667.
The current stock price is just over $30.00. With an EPS of $0.66 and a share price of $30.00, that is a yield of 2.22%. The benchmark 10-year yield is roughly 1.675%. Given this yield rate and the potential for AYR, the stock price looks to be trading at an appropriate level. But, you are not purchasing shares in anticipation of today’s earnings rate; you purchase in anticipation of the following year’s yield.
AYR currently has approximately 500K of square footage in facilities throughout its businesses. They are doubling that to over 1M sq. ft over the next two years. Capacity is not necessarily going to double, per se, in a straight linear fashion. At the same time, AYR is not producing at full capacity at current levels, also. There will be significant increases.
Given an equitable increase with double the production capabilities as well as increasing numbers of dispensaries, should AYR hit revenue levels of $700M in the next 24 months, while simultaneously maintaining the same margin rates, then profit potential would likely push to ~$1.33 per share. This could push AYR stock upwards by double.
The Benchmark 10-Year Yield
But, what will the benchmark rate for interest rates be in 24 months?
This is the $64,000.00 question: We don’t know.
The economy is about to explode with growth after being contained so much from COVID lockdowns. Over 50% of the nation is fully vaccinated. The vacation season is upon us. This hyper-accelerated growth has the potential of really pushing the economy forward. For every action, there is an equal and opposite reaction: Inflation.
We are starting to see big moves upwards in price levels. These may push the Federal Reserve to move interest rates upwards. With interest rates moving higher, price needs to come downwards to maintain an equitable yield.
Given that, while I believe $AYRWF could potentially move upwards, I am not entirely certain that $AYRWF simply goes higher. 24 months out is a little too long to predict future price projections for stocks given the economy showing signs of inflation like it has been. Nonetheless, with the future build-outs and revenue potential gains, I believe that AYRWF could move much higher. The high end would be for the stock to double. The low end would be for price to remain the same given a scenario where interest rates moved upwards too quickly and the stock market began to sell-off.
I am going to split the middle ground and call for $AYRWF price move to $45.00 – $50.00 and continually adjust as the economy unfolds. But, the potential is that the stock doubles.
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