Lowell Farms LOWLF stock is selling off. As it is one of my top picks I wanted to chime in on the latest financial release. Revenues were off and margins dissipated along with that. The stock selling like it has is bringing in a lot of consternation and stress among investors. But, this is a Top Pick and I wanted to assure everyone that if you look at LOWLF stock from the right angle you see what you need to see and can be reassured.
As I have mentioned in the past few videos and emails, I am putting together Discounted Cash Flow statements on the various companies that I cover. With Lowell Farms, all one needs to do is look at the direction and results. From that, the shortfall in revenue dissipates as a concern.
Let’s break down some key components of Lowell Farms so that an investor can see what I am looking at. At the bottom of this analysis, you can find my call on where I expect LOWLF stock to come in at.
Lowell Farms & Wholesale cannabis in California
There has been a complete collapse of wholesale cannabis in California. That is good news if you are a company that buys wholesale and produces your product with that, then dispenses it across the state. But, for the producers of wholesale flower and THC products, the impact is enormous and hits the bottom line across the state of many small players.
Wholesale prices range from state to state and generally range between $1,500 – $2,500 per pound. But, in California, there are some prices that are ranging between $200-$500; down from $800-$1,000 a year ago. Ouch. With light-deprivation crops, prices are down to $600-$800 from about $1,500 the previous year.
Lowell Farms states they are approaching a cost price point of about $165-$200 from their greenhouse. That will keep them competitive. But, despite the ability to produce at such a great rate, there are likely double current supply levels than what the market can bear. So, this is likely going to be a long-term issue.
Premium Products & licensing
Lowell does not necessarily depend on wholesale product production. Lowell produces its own premium branding and that product development and revenue are continually improving. For the California market, Lowell will see continued increases in revenues and the shortfall from the wholesale drop will be made up from the higher margin-producing product of Lowell’s premium products
But, what I am also focusing on is the premium product licensing that has been going on over the past months. Lowell is licensing out its premium brand to Ascend who will grow, process, and distribute the Lowell brand throughout Mass & Illinois. To date, Ascend is having trouble producing enough products at optimal levels to keep up with demand. Good news, if you ask me.
Lowell will be working with Ascend in guiding them to produce at more optimal levels and with high volumes. The end result is that with almost no effort, Lowell Farms will be seeing increased revenues which will almost be entirely profits. From there, I expect more licensing in more states to capitalize across the nation on one of the best brands on the market with little up-front capital expenditures and almost pure cash flow thereafter.
Lowell Farms Stock Comparison
In the meantime, I am breaking down the individual company statistics while the process of developing the business continues.
Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:
- #39 Market Cap: $49M
- #57 Revenue Growth Rate: -17.8%
- #51 Gross Margins: 0.8%
- #26 Operating Efficiencies: 56%
- #41 EBITDA/Revenue: -53.6%
- #28 Cash/Debt Ratio: 25.3%
- #29 Total Assets: $80M
Lowell is still a relatively inexpensive company at $50M. And, they have nearly double the assets which puts them at an undervalued position.
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Lowell Farms LOWLF Stock Financial Data
From a financial stock position, Lowell’s miss on its revenue, the hit on wholesale pricing, and other issues can be seen throughout the financial data. But, I am not necessarily focused on the present as much as I am on what can be done in the future with Lowell.
The revenue shortfall was not such a game-changer event for me. I had figured the trend in dropping wholesale prices would take a hit on many companies across the board. We’ve seen this play out in many other companies such as Aurora & Canopy (and many others) who thought they could both build ginormous production facilities and sell enough cannabis to pay for the facilities and make some extra money thereafter. It doesn’t work that way.
As we all know now, this wholesale approach to creating a cannabis company won’t work because although there are barriers to entry, once you cross those barriers (licensing), there are no size restrictions. An arms race of building up production capabilities ensues. Too much supply follows. Prices collapse.
But, the premium branding always appears to have a solid footing, and, with Lowell, they have some of the best quality products out there. And, they are licensing this.
Given that, with the increasing popularity of the product, you will see solid increases in revenues. And, with the licensing, this will be revenue that has zero cost added to it. This will trickle all the way down the financial statement to net earnings.
Lowell has done a fairly solid job of maintaining its operating costs at lower levels. But, on a percentage basis, given the drop in revenue, obviously there was an increase in the operating efficiency metric as it is simple mathematics.
Had there been an increase of ~10% on revenue for the quarter and Lowell printed its $7M in operating costs this would have been 41% efficiency. This is elevated from where Lowell could be. But, with the increased costs revenues will increase from higher licensing sales and premium branding sales in California.
EBTIDA & Net Profits
Because of the drop in wholesale prices, and the subsequent drop in revenue to Lowell, EBITDA took a hit dropping from mere break-even to -53% of revenue.
I will continually iterate that the premium branding will continually provide the revenue and bottom line the company is seeking. The augmentation of wholesale as a revenue generator will be an added plus. And, with the licensing agreements for the premium branding, the continual building up of the branding will get Lowell to increase revenues on a consistent basis. And, with that, margins will improve.
Cash On Hand
Lowell has some $17.5M in cash at this point. But, they also have plenty of assets. So, while there is a cash deficit of sorts, there is access to capital to continue with the business. But, I would be leery of the potential of a cash raise should future licensing don’t improve the cash flow situation. This is something that I would be looking at.
Despite any concern with cash and the value of the overall business, Lowell has assets of some $80M yet the stock is trading at a price that puts the company valuation at about $50M. They are below book value. Lowell will have the ability to tap that for potential long-term debt so, this would balance out the short-term cash position.
In the meantime, total assets & total equity continually rise while current debt levels have remained relatively flattish. You want to see continued total equity increases with companies that are turning a corner with building themselves up.
LOWLF Stock Activity
I have been heavily focused on the short-selling story for cannabis stocks because I believe this is the real story of why stocks are failing to head higher. Here is the short interest as a percentage of daily volume in LOWLF stock:
Lowell Farms LOWLF Stock Short Interest
There is a little more to the selling we have seen in cannabis stocks than just short selling: Some investors are just getting out and selling their shares. Factor that with daily volume that is high in short sales and you can see how cannabis stocks are pressured as they have been.
But, I am not deterred by this selling. Instead, I look far in advance with these companies that are already turning a profit.
Lowell Farms LOWLF Stock Chart
LOWLF stock has seen a lot of selling. But, mainly, this is more in line with the entire cannabis industry:
Is Lowell Farms LOWLF Stock a Good Investment?
Look towards the future. Then, when you look at LOWLF stock and the current price you see a solid opportunity. The shakeout in California cannabis of wholesale prices will eventually benefit Lowell Farms. Given the potential of licensing one of the top-rated cannabis products will spread throughout the US and continue to add in income for Lowell with little input costs. The eventuality si that Lowell’s premium brand will contribute to bottom line in California. And, with time, the wholesale prices will shift. Even still, Lowell is already producing its wholesale products at profitable levels. This will beat out the competition and the shakeout will inevitably lead to more California firms tapping out. Lowell has access to financial markets in ways that other smaller competitors do not have. Plus, the licensing of premium products will be a main driving factor for profits in the future.
When you look at Lowell Farms you need to look at the bigger picture. Once you do that, looking at the recent sell off, you see a solid opportunity to grab a longterm holding at very low ratios to future earnings. This will be a stock that eventually eclipses $4.00 giving n investor a 10x return. Plus, given enough time, LOWELF stock will push beyond $40.00 making this a 100x stock to hold for longterm investment.
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