Fire & Flower FFLWF Stock Big Upside Potential

Fire & Flower FFLWF stock is a company I have had my eye on for a while.  They are expanding and growing.  Already, Fire & Flower is EBTIDA profitable four quarters straight and look to continue with that.  Also, they are backed by one of the world’s largest retail chains and this should provide all the necessary support they need to continue to grow.  Fire & Flower FFLWF stock will very likely move higher over the coming quarters, Fire & Flower stock continues to see revenue gains and profits.  On the Complete List of Top 100 Cannabis Companies, they are moderately ranked and climbing making them a cannabis stock to watch.

Given its position in the industry, I expect further growth with revenues and earnings and I expect the stock to move higher over the coming years.  As I mentioned in my article on how to get started in cannabis investing, you are looking for EBITDA profitability as the first major milestone.  Then, continued revenue increases will get a company to net income profitability. Beyond that, management will want to target improved metrics.  But, and as I point out below, metrics are already impressive and improving.  As you will see, Fire & Flower FFLWF stock is a company that will see continued increases as they grow with the newly legalized industry.

Breaking down what Fire & Flower FFLWF stock will help to understand what is going on.

Fire & Flower Info

When I first found this company about a year ago I was first struck by a major partner: Circle K.  The company that owns them has ~21.5% of FFLWF stock with the option to purchase up to 51.5% of the entire company.  Note: Once you have over 50% of the company you can basically write all of the rules so they could outright purchase the entire company should they want.  The agreement also allows for up to C$300M in additional investment to be made available.

If you are like me, you kind of laughed at the idea that the people who own Circle K put dispensaries right next to the stores; they are not inside the Circle Ks; there are about 85 corporate-owned dispensaries.  You stop in to get gas and pick up snacks.  Those snacks usually take care of the munchies you will have later.  You can buy gift cards for the dispensaries inside the Circle Ks.

Basically, Fire & Flower’s dispensaries already have built-in foot traffic since people are already stopping at these Circle Ks.  All that is needed is to direct them to the dispensaries themselves.  Revenues are growing; it all plays out.

Fire & Flower Financial Comparisons

I put together a really useful tool for comparing cannabis companies to one another called: The Complete List of Top 100 Cannabis Companies.  In this list, you can compare any of the cannabis companies to each of the other publicly traded cannabis companies.

Here are the rankings for Fire & Flower:

  • #46 Revenue Growth Rate: 6.2%
  • #26 Revenue Per Share: $0.108
  • #47 Gross Margins: 37.8%
  • #33 Operating Efficiencies: 44.7%
  • #26 EBITDA/Revenue: 5%
  • #28 Debt/Asset Ratio: 60.9%

These are very respectful and the overall ratings put Fire & Flower FFLWF stock at a level where you would definitely want to watch the FFLWF stock.

Fire & Flower Holdings FFLWF Stock

In early February, Fire & Flower Holdings announced they submitted their paperwork to be traded on NASDAQ.  At the same time, cannabis companies all saw a surge in buying that pushed stocks upwards.  Since then, cannabis companies have collectively sold off as you can see here:

Fire & Flower FFLWF Stock Best Marijuana Stocks
Fire & Flower FFLWF

So, what could Fire & Flower FFLWF stock be worth?  Breaking down the latest financials may give us a solid idea of where they could be and what that means for the stock.

Fire & Flower FFLWF Stock Financial Data

Revenues are increasing nicely and I’m betting that over the next three quarters Fire & Flower may print about $165M – $175M in total.  I’ve not found any forward guidance for 2022 in the Q4 MD&A and so any future projections are all my own outside of guidance.

Revenue

As I mentioned, I think revenues are very likely to hit about $175m for this year; 2021.  The revenue growth rate is strong and consistent and it is my bet that we will see even bigger gains as new operations are going to take place in the US:

Fire & Flower Revenue - Best Marijuana Stock
Revenue: For Fire & Flower Holdings Financial Data Visit Stock Page

I have been asked before that after analyzing as many cannabis companies as I have what would I choose as a business plan for starting my own cannabis company. Simple: I would have one company produce and package the products on a white-label basis and then partner up with a dispensary to sell that product.  This is the lowest cost method.  Then, focus on the consumer via marketing and social media.  Also, I would focus on one market, such as San Francisco.

Then, if things really got moving forward I would work on building some kind of dispensary system. This looks like what Fire & Flower is trying to do while entering the United States market; they are contracting to license out their products in four states in the US with more on the way.

A new kind of dispensary

This is a very low-cost entry method and if it is done correctly could have the highest possible ROI.  Given this, revenues for Fire & Flower will start climbing significantly and margins will be strong from this simply because the input costs are going to be low.

There are two significant things to point out with Fire & Flower.  First, the Circle K business partnership is extraordinary in that the potential for revenue is very strong.  Plus, there is one more thing: These Circle K stores are already paying rent for the existing land they sit on. The new dispensaries are going to be sitting on this land and they are only going to be about 500 – 600 sq. ft.  Think that through from a cost basis.  That is extraordinary to me.

Next, the partnerships that Fire & Flower are putting together allow for branded dispensaries in the United States (The first to be opened in Palm Springs, CA).  Because Fire & Flower is partnering up it is saving on its licensing costs and working with a company that is already operational and will contribute to increased revenues while minimizing costs.

Gross Margins

Margins are low comparatively:

Fire & Flower FFLWF Stock Gross Margins Best Marijuana Stock
Gross Margins: For Fire & Flower Holdings Financial Data Visit Stock Page

I’m a numbers guy and I like to break things down so that they make sense.  Fire & Flower has margins that are below the average of some of the best cannabis companies I analyze.  The very best cannabis stocks have gross margins of 60% – 65%.

If Fire & Flower were to sell $175M in revenue this year with a 40% gross margin they will have $70M in gross profits.  If Fire & Flower had more competitive gross margins, say, 60% there would be $105M in gross profits to trickle down to the bottom line.  That is significant because the effort is about the same.

Fire & Flower needs to focus on its gross margins.  But, you have to crack a few eggs to make an omelet.  Still, this is the early innings of a very long process for cannabis companies.

But, the future will assuredly see improved gross margins with cost savings putting up dispensaries on Circle K land.

Operating Costs

A bright spot is operating costs for Fire & Flower and as revenues continue higher, assuming a static total operating cost, this metric will continue to improve to the most competitive levels:

Fire & Flower FFLWF Stock Operating Efficiencies - Best Marijuana Stock
Operating Efficiencies: For Fire & Flower Holdings Financial Data Visit Stock Page

The metric measures how efficient management puts out products relative to total operating costs over revenues; you want the lowest possible number.  The best cannabis companies are printing roughly 30% – 35%.  But, Fire & Flower had increased operating costs lately as they are continuing to expand their footprint.

The recent additions pushed operating efficiencies higher the past two quarters from what was ~$9M to ~$16.5M.  But, that number has remained flat the past two quarters.  If that continues while revenues increase to $45M, as I am projecting, this will drive total operating efficiencies down to about 36%.  Then, as the company continues to expand they should see continued downward pressure on this metric.  And, this shows management is keyed into costs and focused on investor value.

EBITDA

I love a company that achieves EBITDA profitability, as Fire & Flower has achieved over the past few quarters:

Fire & Flower FFLWF Stock EBITDA - Best Marijuana Stock
EBITDA: For Fire & Flower Holdings Financial Data Visit Stock Page

What this means is that core margins and costs can cover the costs of the core business.  Now, all Fire & Flower needs to do is increase revenues.  And, via economies of scale, this will allow marginal profits to trickle down into net earnings.

At this point, the core business can float itself and all that is necessary is continued growth in revenues.  But, gross margins are still the sticking point for me: Fire & Flower needs to get to more competitive levels with gross margins.

That being said, the additional $35M in gross profits would drip down to net income; profits for investors.

Is Fire & Flower FFLWF Stock a good buy?

There are some ~340M shares outstanding.  If Fire & Flower were to continue to increase revenues to $175M as I am projecting and they could bring in a modest 5% of revenues to net income this would amount to some $8.5M in net income; about $0.0256 EPS.  Given a 40x future earnings multiple this puts FFLWF stock at $1.00.  However, it should be noted that this is a very modest projection.

There would be two important things to note:

  • Revenues will continue to increase as Fire & Flower continually builds its footprint; and,
  • the 40x future earnings is average for a normal company and not in line with where the future would value Fire & Flower; a cannabis company.

I am expecting that there will be about $250M in revenue for 2022.  Given the increase in revenues and the potential for such increased margins coming from operating on Circle K property is going to push this stock upwards to perhaps 100x future earnings. This puts the stock at much higher multiples given its potential.  Because of this, I could see FFLWF stock pushing to $2.50 – $3.00 soon.

What are my favorite cannabis stocks?

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