I had received many requests to take a deep look at Verano Holdings VRNOF Stock. This cannabis company has always been on my list of things to do from all cannabis companies. Typically, I shy away from bigger cannabis companies. You have an assortment of companies that received capital infusions and outside investments from more established companies looking to grow their revenue sources. These investments mostly fizzled out and produced more loss than gain. Given that, as mentioned, I shy away from these larger cannabis companies.
This does not mean there are players that are large that are not also solid cannabis investments; the two terms are not mutually exclusive. Take for instance Green Thumb Industries, AYR Wellness, Trulieve, and Curaleaf. These are all solid performers and at some point, I believe will outperform the better-capitalized cannabis companies.
When I saw the latest financial data on Verano Holdings I immediately knew that I needed to push this company forward and analyze them as quickly as I could. The metrics are beyond impressive; they may have the best overall metrics of the top cannabis investments.
Value Investing & Cannabis Companies & Verano VRNOF Stock
When I look at cannabis stocks as a possible investment, I look at a few key metrics to evaluate these companies. But, one of the most important things I am looking for in an investment is consistency. If you have a company that is consistently printing increasing revenue gains, then one can reasonably assume the very next quarter would also see a revenue gain. This is by no means gospel; outlying circumstances certainly occur, such as global pandemics.
Nonetheless, the phrase all else equals can apply and in the case of consistent revenue gains, given outlying circumstances being contained, a company that prints consistently growing revenue will likely print revenue growth in the next quarter as well.
How high is high?
Beyond revenue growth, I also look and compare metrics to other companies. This is important. If I said that a marijuana stock had increasing revenues but their gross margins were all of 50%, is that a good thing or a bad thing?
Everything is relative and that is why as a value investor, knowing the field in which a company plays and where they stack is such an important metric to keep track of every other company out there so that an individual can assess any one company relative to what the industry is producing. Know all of the key metrics in an industry is absolutely essential.
For the record, 50% gross margins would be a solid number, but below the better-performing cannabis stocks.
What about EBITDA?
EBITDA profits are important for cannabis companies. EBITDA is not an official GAAP item but, a metric that financial players have come up with to measure a core company’s capabilities.
Basically, you have revenues and then you have two core costs for a business. First, what are the costs to produce a product such as material costs and labor? This would be the metric that helps us determine what are gross margins.
Next, what are the costs involved in running a business in general such as administrative and sales? There are Total Operating Costs, but these tend to add in Depreciation and Amortization as a deduction. EBITDA is Earnings Before Interest Taxation Depreciation and Amortization. So, EBITDA tells us the core company and what is possible from a profitability standpoint.
If a company is EBTIDA profitable then we can tell that the core plan for this company will be profitable. The only real thing to do is to push for economies of scale to have marginal profits continue to add to the bottom line.
Given that, EBITDA is very important to a value investor.
Is Verano VRNOF Stock A Good Buy?
Now that we have a basic foundation for looking at any one respective company we can look at financial metrics to see how any one company performs.
Marijuana stocks are collectively turning a sharp corner with regard to certain key metrics. Collectively, EBITDA profitability is being achieved by a majority of companies. And, we are starting to see some companies print net income positive numbers.
This is being driven by the obvious two variables: Increased revenues and cost-cutting metrics.
Verano VRNOF Stock Financial Data
Revenues for Verano Holdings went up some 60% QoQ for Q1 2021:
I want to point something out, however: guidance for Verano Holdings is expected to have revenue hit $800M this year (And some $1.25B for 2022). Given that, and per management, next quarter is anticipated to hit approximately $200M in revenue. This would find an additional $450M remaining in order to achieve the guidance figure.
My bet is they, ahem, smoke this number. We are seeing substantial increases and despite the fact that there are some operational constraints with regards to location and such, increases are higher than expected in a lot of markets.
Numbers we are seeing in Illinois and Arizona are surpassing expectations so I am wondering if this will be the same for Verano Holdings; they are multiple locations in one form or another. Currently, they have operations in 12 states with another two more on the way via acquisitions and organic expansion.
Simultaneously, they will access the capital markets and this will allow entry into the Florida market; they are in the process of closing the AltMed deal. They also have an additional 9 other deals they will be closing soon.
Given this, with so many deals happening the $800M is no longer valid. Nonetheless, we can still assess the future of this marijuana stock: Verano Holdings
Margins are not simply a sweet spot for Verano Holdings, but, instead, margins are an outlying factor. Gross margins for the S&P 500 are averaged at about 40%.
This chart may be a little misleading: gross profits are printed at ~62% for Verano Holdings. There were outlying factors that drove this upwards and these are outside of normal business functions. The 62% was a slight decrease from the previous quarter.
Marijuana companies that print between 60% – 65% are solid performers. At 62%, this puts Verano Holdings right in the middle of the pack and is a solid metric.
But, there’s a far better metric that I like that leads to having Verano Holdings be such a solid performer.
Operating efficiency is a metric where we take Total Operating Costs and divide them over Total Revenue. This gives a metric that is usable to show how efficient, operationally, any one cannabis stock is versus another. The very best companies I am looking at are usually between 30% – 35%; here is Verano Holdings operating efficiencies:
Once again, this chart is misleading: They actually printed about 20%. There were additional outlying factors that ended up in this metric. Operationally, they spent all of $29M for the quarter (versus the $120M revenue).
This is an outstanding metric comparatively. As mentioned above, most companies are much higher in this metric.
Verano Holdings has excellent revenue growth and that is going to continue over the next few quarters. There will be significant revenue growth from numerous acquisitions so, even the $800M is obsolete.
EBITDA & Net Profits
Moving on down the financial statement, we get to EBITDA which I outlined above. Here are Verano Holdings EBITDA numbers are well above the norm:
On a percentage basis, this marijuana stock is printing EBTIDA profits at 52% of revenue; that is unheard of. But, if you take the 62% gross profits and subtract operating costs of 20% (You also need to back out Depreciation and Amortization which is about 10%), you can see the math checks out.
Mind you, for comparison’s sake, the S&P 500 is printing an average EBITDA profit/Total Revenue percentage of 10% TTM. Most of the best marijuana stocks are only printing 30% – 35%, at best. To be bringing in 52%, that is beyond comparison.
This all trickles down to two things: Net Income and Free Cash Flow. Here is net income for the quarter:
This equates to $0.27 EPS. If we break this out and factor zero growth but maintain the EPS, you are looking at a 6.01% yield over a year’s time.
This is the opportunity that I see. With the economy starting to transition and the Federal Reserve likely to take away the punch bowl, a yield of such a high level will draw in significant numbers of buyers.
The transitioning is going to push investors out of their stale-ish investments and they will begin to chase higher-yielding stocks. Verano Holdings VRNOF is absolutely a marijuana stock to buy right now. As the future market continues to transition, this company will get bought up by hungry investors.
Given an in-kind metric, this marijuana stock should be printing above $60.00 per share, if not all the way up to $100.00.
I am looking for a continued increase in this marijuana stock. I would be a strong buyer of this stock, and very likely I need to add this company to my Top Picks; the best marijuana stocks to buy.
Mr. Market is making an offer for VRNOF stock; as long as VRNOF stock continues lower I will be buying VRNOF.
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