I have known about this company for some time; Schwazze $SHWZ. I have lived in Colorado where they are based. But, doing an analysis on them did not make a lot of sense simply because the financial data was not very exciting. But, that is changing rapidly and I think there is an opportunity here. This cannabis vertical company has 17 dispensaries in Colorado. Revenues increased significantly the past quarter and on a pro forma basis would have been even far higher. The metrics are starting to get to impressive levels; they are on the cusp of profitability.
One thing to keep in mind is that Star Buds had been acquired at the end of the quarter. This is where a lot of the growth you will see comes from. I will be presenting various mixes of financial data because of this.
To start, here is a look at the latest chart on $SHWZ:
No different than other cannabis stocks, this chart has mostly moved in tandem with fundamentals outside of the most recent election and political moves in the United States.
But, Schwazze is a Colorado company. This means that there are a lot of restrictions on the company with regard to expansion. Colorado cannabis companies are only allowed to operate inside Colorado. But, they could get acquired and continue to operate inside Colorado; we have seen this occur in a few instances. This makes Schwazze an interesting prospective investment.
Colorado Cannabis Numbers
Here is a look at Colorado’s retail sales for cannabis:
Prior to COVID, the trend had been flattening modestly. The state is becoming mature. But, this is a chart that has taken some 7 years to play out. This does give us a general guideline as to what is possible for the rest of the country, state by state.
Within this, Schwazze has been moving higher but recent acquisitions have pushed revenues upwards. Management has guided for continued moves upwards in revenues.
First, there are three things we will be looking at with regards to Schwazze and its revenues. There are GAAP revenues that I will present briefly. Then, there is the pro forma that I will be presenting with what Schwazze could have printed had the recent acquisitions been completed at the beginning of the quarter. Finally, there are future expectations. So, lots going on here. Let’s look at some numbers.
Here is the revenue that Schwazze printed for Q1 of this year, 2021:
This is the state GAAP revenues, but as far as I am concerned, this is not what we need to look at or analyze. Instead, let’s switch it up to the pro format amounts had Schwazze been able to accrete all of the revenue from the recent acquisition of Star Buds.
Here is the pro forma revenue:
This represents a 30% increase. Mind you, Schwazze already had a significant revenue increase for the quarter and the extra revenue is notably even bigger.
Guidance for Schwazze for the company for this year is expected between $105M – $110M. I think this is ultra-conservative. Colorado cannabis increased 25% throughout the entire state YoY from 2019 to 2020. If there is an approximate 10% increase from this year’s Q1 to next year’s Q1 that puts revenues up to closer to $30M on the top end. Do a gradual revenue projection for the year for Schwazze and you see more like $115M for the year. But, I believe that even this is ultra-conservative and that more likely Schwazze prints near $125M, or more.
I am going to use the $125M as the future projections for Schwazze and current metrics for margins and costs. As it turns out, the Investor Presentation puts out a statement of $125M for potential revenue (Versus the latest conference call on their earnings release).
Gross margins were 37.3%, but upwards of 54% pre-adjustment:
I want to make clear that “pre-adjustment” does not coincide with pro forma but, instead adjustment of organic matter at value. Very possibly with what is now 17 dispensaries, Schwazze could push through a lot more product and not have to write down any losses of organic product, or adjust inventory levels. For now, the 37.5% is low, but within shot of levels that would be competitive.
Total Operating Costs
I wanted to show total operating costs on an actual basis; something I do not always do:
I think this is a good example of what operating costs look like for on company that is growing. Operating costs have nothing to do with gross margins, those costs that deal with the actual making of the cannabis products. Instead, operating costs are more SG&A; Sales, General & Administrative. If you continue to open up dispensaries you are going to take on more costs (Rent, for one). Then, there will be an expansion of general costs.
However, operating costs do not necessarily increase at the same rate as revenues. With more dispensaries, you are going to sell more cannabis (Hopefully). And, on a YoY basis, hopefully, you see each dispensary grow revenues organically.
Sometimes, however, I have seen companies print near flat-line operating costs. Yet, revenues continue to increase. So, that is a possibility that Schwazze may get to at some point as they mature.
Ultimately, this trickles through to a mathematical metric called Operating Efficiency:
NOTE: I do not have the pro forma numbers for operating costs. Had I, I bet we would see vastly improved numbers in this metric. As revenues increase at a fast rate and operating costs increase at a slower rate, this metric will show improvements. Nonetheless, with the GAAP numbers (Generally Accepted Accounting Practices), 45.1% is solid and close to levels that will be competitive.
This is another area where I will be closely watching.
EBITDA & Net Revenue
Here are GAAP EBITDA profits:
EBITDA profits are said to come in about $30M off of the $110M. I think this is likely to be low even if revenue only comes in at $110M. At 30% of revenue that is not bad; I have seen better. This gives us the ability to project a little better as I can reverse engineer the numbers to get to what might be net earnings/income.
Keep in mind what EBITDA profits actually are: They are the core business metrics of revenue, less cost of goods and operating costs; less depreciation, and amortization.
If a company prints some $100M in revenue and received 30% in EBTIDA then the “bottom line”, that line right at EBTIDA would mean they received $30M in EBTIDA profits. Costs would have been 70% up to that point in the financial statement. Cost of goods would have likely been about 40% and operating costs (Less depreciation and amortization) would have been about 30% (Slightly less since you have to back out the depreciation and amortization).
The 40% is high; lots of room for improvement and that is an opportunity for someone wanting to speculate on a company. Next, you would likely see about an additional 5% in depreciation and amortization as well, you would likely see an additional 10% in continuing costs (Costs associated with financing debt and other, outlying costs).
So, had this company achieved these levels, they would be bringing in some 15% of revenue for net earnings. That would mean $15M in profits for shareholders.
But, often as is the case, continuing costs and outlying costs eat into these profits. A company would need to continue to scale up and create further economies of scale and marginal profits in order to actually become profitable.
As it turns out, Schwazze has fairly low continuing costs, and this is something that I like about these guys: They have relatively low financing costs relative to revenue. Operating income was about $6M. Unusual items were -$3.5M and financing costs were about -$3M and net income came in around $-3.6M:
Schwazze is very close to net profitability. As they scale up and earn marginal profits from each additional unit sold they will continue to add more and more to their bottom line. I expect they could print positive net income this year. But, I do not necessarily expect that an investor will enjoy net profits. Instead, Schwazze will continue to build its footprint and expand. Then, with a much larger footprint, an investor will see potentially larger net profits from the same investment.
Is Schwazze A Good Buy?
As I mentioned, I believe that Schwazze is within striking distance of becoming a solid performer. There is just one thing else to look at: Shares outstanding. There are 42M shares outstanding which give them an extremely low float. When you look at the stock price and relatively low float versus revenue I may be considering this stock for one of my Top Picks.
If Schwazze were to actually print the above $15M in revenue that I gave as an example, that would calculate out to about $0.3575 EPS. At 100x future earnings, that is a stock price of $35.00.
Schwazze has a lot of potential. And, there may be one more thing. Being that they are exclusively in Colorado, this gives them a huge advantage. I can see them merging with another, bigger player such as an MSO. That alone is something that would drive me to want this stock. I see $SHWZ as being significantly undervalued as is. And, the potential of it being acquired by a larger MSO means any acquisition would likely come with premium attached to the deal; driving price even further upward.
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