The Valens Company VLNCF Stock May Be In Play and reasons to buy

The Valens Company VLNCF stock is anything but extraordinary.  Yet, there is a compelling reason to buy this stock.  When you break down the financial statements, looking at the comparison of The Valens Company VLNCF stock to all of the other companies within the Complete List of Top 100 Cannabis Stocks, mediocre may be the call of the day.  The Valens Company is trying to be a purely white-label manufacturer of cannabis products.  There is likely a strong amount of demand for this kind of business model.

But, the compelling reason for acquiring The Valens Company is likely due to the fact that there is an 800-pound gorilla in the room buying the stock up simultaneously: Sundial Growers SNDL stock.  Sundial is likely to grab the entire company at some point and if your game is quick profits in the market this may be a play for you.

Notwithstanding that potential move, The Valens Company is not exactly the best opportunity to invest in.  Their numbers are unimpressive at times and revenue is flat.  But, now all of a sudden with the Sundial Growers relationship, maybe new companies using The Valens Company services of white-label provider will have the largest dispensary system in Canada to sell products.  That may push more products through the system pushing up revenues, margins, and ultimately profits.

The Valens Company VLNCF Stock Comparison

Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:

  • #20 Market Cap: $315M
  • #64 Revenue Growth Rate: 7.5%
  • #60 Gross Margins: 26.5%
  • #56 Operating Efficiencies: 104%
  • #67 EBITDA/Revenue: -59%
  • #21 Cash/Debt Ratio: 57.9%
  • #16 Total Assets $139M

As I mentioned, not exactly the best numbers.  In fact, The Valens Company is low to middling in almost every metric.

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The Valens Company VLNCF Stock Financial Data

Here are the latest financial numbers on The Valens Company to include the recently released Q3 August numbers.

Revenue

Mostly, revenue growth is nearly as flat as the state of Kansas:

The Valens Company Revenue
Revenue: For complete Valens Company financial data visit VLNCF Stock page

There really is no growth here despite the increased revenue growth for the quarter.  If we take away the previous high mark for revenue from 2 years back, this is the highest revenue to date.  There is a consistent higher drift of revenue growth but, there is not anything that really tells a story of consistent growth that we are simultaneously seeing in cannabis in Canada.

What I am wondering is that if Sundial were to offer the opportunity for new customers to dispense products through what is now about 165 dispensaries in Canada this could be a way to sell more products for these white-label customers.

However, I have no idea at this point what that relationship is like between Sundial, The Valens Company, and ultimately, a customer of the Valens Company.

Gross margins

More revenue would typically translate into more improved gross margins.  In the case of The Valens Company, the bar is set pretty low, so that is a good possibility:

The Valens Company Gross Margins
Gross Margins: For complete Valens Company financial data visit VLNCF Stock page

There is a non-linear relationship between revenue growth and the increase of gross margins.  What we can tell is that when The Valens Company was printing far higher revenue previously, they were also printing vastly better gross margins.

For now, the middling numbers don’t add up to the start of EBITDA profitability.  An increase of 20% in revenue growth, should it also push gross margins upwards some 10%, would translate into only about $300K in additional gross profits.

Looking towards operating efficiencies, that potential $300K would not even put a dent into the problem.

Operating Efficiencies

In the next metric, you want the lowest possible number:

The Valens Company Operating Efficiencies
Operating Efficiencies: For complete Valens Company financial data visit VLNCF Stock page

The very best companies are printing between 30% – 35% in operating efficiencies and given these numbers above, there is a lot of work to do.

Ultimately, this is mathematics.  If operating costs were to remain exactly the same while revenues increase, on a relative basis, this pushes the above metric lower and lower.  But, the math has to be consistent that operating costs increase at a rate lower than the increase in revenue.

This checks out simply because there are a few costs inside this metric that will likely remain consistent, such as the salary of a CEO.  Typically, increases in revenues also turn into improvements in operating efficiency metrics.

EBITDA Profits

The Valens Company has a ways to go until the become EBTIDA profitable:

The Valens Company EBITDA
EBITDA: For complete Valens Company financial data visit VLNCF Stock page

The fact that The Valens Company is spending over 100% of their incoming revenue on operating costs is a red flag for me.  A new company’s goal is always to achieve EBTIDA profitability after producing and selling their first products.  It seems that The Valens Company is moving in the wrong direction.

Net Earnings

Just as EBITDA profits are moving lower, The Valens Company is not net earnings profitable and are burning cash:

The Valens Company Net Earnings
Net Earnings: For complete Valens Company financial data visit VLNCF Stock page

The burn rate is going to be problematic since The Valens Company only has about $20M cash remaining; about 2 quarters’ worth.

With so much money going towards operating costs and gross profits as low as they are on a percentage basis, this is a concern.

Total Equity

During the past quarter, The Valens Company was able to increase its equity position:

The Valens Company Total Equity
Total Equity: For complete Valens Company financial data visit VLNCF Stock page

Assets are what drive the company’s ability to generate revenue and, by extension, profits.  These same assets may be a way for The Valens Company to borrow against future potential in order to float current operations.  But, I believe that Sundial Growers is likely to be involved in the future.

Cash/Debt Ratio

Considering how the cash position works out, the numbers continue to depreciate:

The Valens Company Cash Debt Ratio
Cash Debt Ratio: For complete Valens Company financial data visit VLNCF Stock page

The Valens Company is sitting on about $20M in cash at the time of the latest release.  That is all of about 2 quarters left of cash available which would mean given their burn rate they are going to have to raise capital.

That is interesting considering the Sundial share purchases.  Seems to me that getting money from Sundial Growers would be an easy sell.

The Valens Company VLNCF Stock Chart

If you look at this chart, in March, when all of the other cannabis stocks started selling off, The Valens Company VLNCF stock started going higher and higher.  That was Sundial acquiring a large position in the company:

The Valens Company VLNCF Stock
The Valens Company VLNCF Stock

The moves in March were sloppy, at best.  But, after the buying stopped, just like all other cannabis companies, and representative of the opportunity in pot stocks broadly, VLNCF stock started to move lower and lower.  But, Sundial started grabbing up more shares since.

The latest financial release saw selling on the stock. So, the question now becomes what will happen with VLNCF stock if they need to raise cash and instead of turning to Sundial, issue more shares in the market.

Is The Valens Company VLNCF Stock A Good Buy?

First, the financial numbers are mediocre, at best.  But, anyone looking towards acquiring this pot stock may want to envision what it would look like down the road for an acquired company.

First, Sundial has very mediocre numbers itself; an irony that they are acquiring a mediocre company has not been lost with me.  But, if Sundial were to continue to put together a very large puzzle then, this is an opportunity in itself.  Sundial has two big things working in its favor at this point: The biggest dispensary system in the country of Canada and, tons of cash.

If Sundial were to acquire The Valens Company then Sundial would have an interesting piece of the puzzle for a big picture outlook.  Then, The Valens Company would be able to offer distribution to its customers.  That would be highly enticing for any fledgling companies to pass up as an added benefit.

That makes the deal interesting.  But, will it all play out that way?  Sundial continues to buy more and more shares.  And, they also have about $750M in cash left to put to work.  The Valens Company needs to raise cash.  Doing the math, there is likely to be a bigger deal on the horizon that would push the stock price upwards.  But, that is only if Sundial acquires all the outstanding share and then funds The Valens Company versus merely creating a loan.

It’s an interesting position to consider.

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