Gage Cannabis, $GAEGF in the US and $GAEGF up in Canada, wants to dominate the Michigan cannabis market. Analyzing this stock has been on my list of things to do for some time. Unfortunately, Gage has only recently gone public so there is not much information out there. This is what has kept analyzing the financials delayed. Nonetheless, it is a popular cannabis stock and has attracted a lot of attention from people wanting to get involved in cannabis investing. Despite there not being a lot of recent financial data, if you are sluethy enough you can put together a few pieces of the puzzle and determine what is possible with Gage. Please note, however, for my regular followers, this analysis is going to be quite different than normal.
To start, here is a look at the most recent Canadian stock price movement for $GAEGF:
You can see the initial price offering. But, since then the stock has sold off. Now, it is starting to head back up higher. The question is, where could the stock price be?
Gage cannabis, as I mentioned, is focused up in Michigan. They have some 7K pounds production possibilities per month of which about 4K outsourced per month all of which should be on line and ready to go in short order. Also, they will have about 20+ dispensaries by the end of the year. All of this seems like a lot. So, I wanted to break down the numbers to get a better understanding of Michigan.
Cannabis in Michigan
First up is the population statistics to keep in mind possibilities. Gage only operates in Michigan and from what I can tell has no plans to expand outside of that. I do not know of any large-scale MSOs also operating in Michigan on the same scale as Gage is right now. However, I am aware that Red, White & Bloom $RWBYF just received approval from the state of Michigan has approved to become a holding company and purchase other cannabis companies. My knee-jerk reaction to that new release was: Could they want to purchase Gage?
There has been a small amount of overlap between Gage and RWBYF, but, I don’t really see anything else there. What I could see is another outside and far larger player approaching Gage later down the road and, that could be an interesting partnership. No info on anything like that right now.
In the meantime, breaking down the population numbers for Michigan, the state is #11 on the list of most populous states with some 9.9M residents. There are about 7.7M adult residents and this is what I’ll be looking at. At an average of about 10% of core users of cannabis, this puts the practical Total Addressable Market (TAM) at about 700K people who would use cannabis on a very regular basis. There are other people who will consume cannabis on a far less frequent basis. But, that core is where the consistent money is.
Given this, the frequency of usage is about 36% using the product once per day and an additional 22% using the product at least once a week. So, that is some 200K using some amount of cannabis every day and the other 150K using cannabis probably 2-3 times per week. The rest we can assume use with enough frequency to count in a listing I’m certain there is some balance between the amount smoked on a frequency basis.
The question then becomes: How much does an individual consume?
Here is what I know about cannabis consumers: They consume a lot if they’ve been doing it for a long time. Those 36-percenters? They are likely consuming about 2.5 grams a day. That means the 200K people are likely using about 500K grams per day; about 400K pounds a year (For just the daily users).
When I first saw the numbers on Gage and its capabilities I thought their production possibilities were too high. After looking at the possibilities, I can see there is a lot of upside potential. Fact is, Gage is going to be a potentially small player in a big market: they may need to increase size.
So, we know that the TAM is higher than Gage’s output possibility. For now, they have provided revenue from 2020 as well as Q1 revenue.
Gage has the ability to produce some ~7,500 pounds of cannabis per month. Retail prices of this amount to about $10.00 per gram, or about $35M in monthly revenue potential; that would be approximately $420M in total revenue annually. But, that assumes that 100% of Gage’s product they grow is sold in its own dispensaries. Gage does a mix of wholesale and retail. The total annual revenue, balancing out wholesale sales and retail sales in its own dispensaries should be roughly $350M.
For now, they are about 10% of that. There is upside potential.
For now, Q1 reported $17.5M revenue and expectations are that Q2 is expected to hit between $26M – $30M. At that level, with a continual increase in QoQ, this would put Gage’s revenues at about $125M for this year. But, going into next year, Gage is expected to achieve a major portion of its production possibility. I am thinking they could easily surpass the $125M, which is likely an ultra-conservative number. But, I don’t know that they will achieve sales levels appropriate for their operating costs.
Gross margins are increasing but, they are still a bit shy of where they should be. If Gage were to increase revenues as they are then margins could push upwards. For now, Q1 & Q2 margins are low at 45% & 50% for flower and 26% & 17.5% for the entire company, respectively. I would expect company-wide, margins will increase significantly as they get better and process more volume. Still, from this starting point, it is a bit on the soft side.
What is interesting to me is that usually dispensaries have solid margins. They have fairly fixed costs so it is easy to pace these things out. Yet, it appears that Gage’s grow operations have the better margins picture for right now.
Total Operating Costs
This is an area that is of concern to me for right now and I want to see how the picture unfolds; that being total operating costs relative to revenues. Maybe Gage hits $125M this year in revenues. Not bad. But, they will have production possibilities of $350M. That means they are only running about 35% of total capacity. Will there be significant increases in revenues? Maybe.
This is the metric that I will be following closely. If Gage cannot get to about 65% of capacity with sales, they may be sitting on some production possibilities that are underutilized. That generally means higher costs relative to revenues. While they may grow to that level over the course of the following year, the end of 2022, they have a ways to go.
This is a very minor red flag for me, one I’d be interested in seeing how fast they come up to scale relative to capabilities.
Cash On Hand
Gage has about $45M cash on hand. They also have about 212M shares outstanding. That means about $0.21 of cash is baked into the share price. The stock is trading about $2.75 per share so, this means the company’s potential is about $2.50, according to investors. I had wondered on this one issue, where they would be in regards to cash on hand and shares outstanding.
So, can the current trajectory then justify $2.50 in share price? Probably not. Except for one thing.
Gage Cannabis & Value
With 212M shares outstanding, and a potential of about $350M in revenues, all else equal, net earnings would be ~$40M. I get to this level by assuming Gage can get to $350M revenue, 60% gross margins, total operating costs of 35%, and an additional 11% in continuing costs. There should be some 15% in total revenue to trickle through to net profits. That is about $50M, or about $0.035 EPS. At an approximate 100x future earnigns, with would put the stock at about $3.50. Not much upside.
This is value, mind you. But, it is not as much as other companies in the arena. Nonetheless, that is about 50% increase and it is likely to happen over the course of 9 months’ time.
One more thing…
If there is one thing that stands out to me with regard to Gage Cannabis, it is this: Can anyone tell me off the top of their head any of the major players operating in Michigan? Red, White & Bloom is clearly entering the market, but are not there yet. Other than RWB, I cannot readily name any one major player that has a stronghold in Michigan.
That means the licensing of Gage has value. A major player could easily approach $GAEGF, who will be very well established in the state and acquire Gage. Acquisitions usually come with some premium. I have no knowledge of any one company lining up to do this one thing. I am just approaching this as a potential opportunity. Gage could very well fold itself into a far bigger operation. Then, with the established dispensaries, the acquirer could start selling its own products in these dispensaries. Then, with a new parent company, Gage could start selling its own products in other states through the parent companies network. There would be increased sales and revenues for both Gage and this parent company. They both win and therefore the shareholders would win.
It’s just something to keep in mind.
In the meantime, Gage will dominate Michigan and likely increase revenues along the way. I expect by the end of 2022 Gage will be well on its way to having about 75% – 85% of its capacity utilized and margins will likely be doing very well by that point.
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