Columbia Care CCHWF Stock is being acquired by Cresco Labs CRLBF stock in an all-stock deal. I wanted to break down the latest Q4 financial release for both companies as to be able to determine what is going on with these cannabis stocks. I will do this individually with CCHWF Stock Forecast as well as CRLBF stock forecast. Once I have these two separately, then I can combine the stock forecasts to determine if this is a good deal.
The first thing about this deal that sticks out to me is the acquisition price of CCHWF stock. It is an all-stock $2B deal. Is that good? In order to determine that I am going to use a Discounted Cash Flow Calculation (DCF) to establish the CCHWF stock forecast. A DCF is a model that shows what a stock is worth today given its future cash flow. Currently, CCHWF stock has a market capitalization of $933M (This, after the drop from $1.3B when the news was announced). Now, Cresco Labs will have to pay 2x the price of the current share price for CCHWF stock.
Is it worth it?
The Good, Bad, & Ugly
Although initially I thought the acquisition price was high, I now see it as too low. Interestingly, I have company; there is a lawsuit alleging that the board failed in its fiduciary finding and sold out at an undervalued amount. After running the numbers, I tend to agree. Columbia Care has significant growth potential after all of its CapEx. Plus, they are on the verge of EBITDA break-even and the profitability. This will drive future unlevered free cash flow which drives current value today.
A discounted cash flow calculation answers the question of what future cash flow is worth. Two things should be noted, however. First, it is a model. Second, all cannabis stocks are undervalued versus the broader market.
Still, let’s break down Columbia Care and then Cresco Labs using the same measuring parameters.
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Columbia Care CCHWF Financial Statements
Here is the latest financial data from Columbia Care Financial Statements.
Columbia Care Gross Profits
From 2020 to 2021, Columbia Care pushed its revenue to more than double from $180M to $460M. That growth is expected to continue going in to 2022 with the goal of $650M in revenue. Gross profit moved from $62M to $190M, respectively. And, this should push toward $350M in 2022. Should Columbia Care achieve both its gross revenue & gross profit metrics, gross margins will clear 50%.
The industry has seen a slight contraction in gross margins the past quarter. And, industry pundits have been keying in on this. Columbia Care, being a vertical integrated company will have room to work with its gross margins. In fact, I could see further increases in gross margins in the years to come and perhaps achieving the 60% level where the more competitive companies are sitting.
Columbia Care Operating Profits
Operating profits saw a decline owed to cost of goods increases. Nonetheless, Columbia Care is close to competitive but, there is still a ways to go. The announced acquisition could address redundancies and enable cost savings with Sales & Administrative costs. Until then, the outlook for 2002 is for approximately 20% Adjusted EBITDA.
The very best companies are performing in the 30% – 35% range. Should the merged entities be able to push lower here, this could push EBITDA upward for the year and potentially clear 25%. It should be noted that the broader S&P 500 prints an average of 22.5% EBITDA. With the current rate and the possibility of hitting 20% for 2022, there is room for gains. And, the operating costs may be one of the bigger targets for these cost savings.
This goes back to the margins outlook that I mentioned earlier and that I believe the sector is going to be targeting margins a bit more now that COVID is in endemic phase and that cannabis use appears to be declining organically.
Columbia Care EBITDA & Net Profits
As mentioned, EBITDA should print about 20% for 2022. And, as mentioned, there is room for gains here. I will continually point out that there is going to be a lot of M&A activity in cannabis as companies push for improving margins. Operating cost reductions and vertical integration across bigger platforms will be a way of improving margins.
But, for Columbia Care to really become competitive they will need to be more consistent with their output and increase gross margins. Then, with reduced operating costs on a relative basis, there will be increases in profitability.
A goal could easily be set for EBTIDA to reach 30% for 2024. There are some companies that are already there within the cannabis sector. And, with CapEx expenditures, there will be solid revenue gains going in to the future.
Columbia Care Cash On Hand
Cash on Hand has been dwindling the past three quarters. But, Columbia Care, on its own, will easily have access to capital. Still, the inability to achieve the most competitive levels with margins while continually increasing its footprint means that Columbia Care is going to burn cash a bit more. However, the burn rate is likely to be contained in a manner that is manageable.
In the meantime, utilizing equity to increase future revenue growth will enable for continued profits in the long term.
Columbia Care Total Equity
There is a lot of money being spent on CapEx and, that is something I always like to see. This will drive future assets as they come on line. Those assets will convert into revenue which, eventually, that will convert into profits. With Columbia Care, an investor will want to play the medium-to-long game. Columbia Care is close to success with its strategy. Now, they will have a vertical platform of 16 states to work within and increase its offerings in more areas.
There is still plenty of total equity to ensure that Columbia Care could leverage its position and continue to grow. I wonder, however, if there is going to be even bigger revenue gains and cost cutting associated with the Cresco Labs deal that the market is not pricing in.
Columbia Care Stock Forecast
Columbia Care CCHWF DCF
Given the information we have on Columbia Care right now, they have a change in working capital that is impressive for the past year. And, this is a company that is spending on CapEx, which will result in increases in revenue in the future. For now, they are not hitting the mark with margins but, that is part of the process. Columbia Care will get there. With the new developments in the company driven by CapEx there will be more revenue. The with economies of scale, this will result in margin improvements.
Diversifying their products into a more extended footprint with 16 states means there will be bigger revenue gains. And, utilizing existing production facilities will mean controlling costs and with economies of scale, there will be improving margins.
For the DCF, I went a bit on the softer side since Columbia Care has not even achieved EBITDA profitability consistently on a non-adjusted basis. Nonetheless, on their own, they will get there. Even with soft numbers, the future potential of Columbia Care given the future unlevered cash flow, this is a stock that could easily be above $8.00 per share, of not as high as $12.50 to $15.00 or more.
Note, that $8.00 stock price, given the 363M shares outstanding puts CCHWF market capitalization at ~$2.9B. But, the market is not in the mood to realize cannabis stocks’ potential just yet.
The big question is whether the $2B acquisition price is sufficient. Initially, I thought it was high. Now, I feel like I am doing everything I can to suppress data in order to get down to where I got this price. At $8.00, with 363M shares outstanding, that puts the valuation at $3.1B.
There is a lot of future potential with Columbia Care and, I am not certain the current acquisition price properly reflects that. Also keep in mind, the $2B acquisition price would put the stock at approximately $6.88. CCHWF was just there on its own just a couple of months ago. If anything, Columbia Care is in a better position now since the previous year as they continue to improve and increase revenues.
I’m not sure I like the deal at all.
Is Columbia Care CCHWF Stock A Good Investment?
I can see how the deal with Cresco Labs would fit nicely with Cresco Labs. First, you will recall that Cresco Labs acquired Bluma Wellness down in Florida about a year ago. And, given the current footprint, there is not a whole lot of overlap. Any overlap that is there between the two firms would likely drive cost savings soon and later on down the road.
Columbia Care is spending a lot with CapEx and that will drive future revenue. And, when you look at Book to Price ratio, this is a stock that has a lot of potential with a move higher.
The deal for Columbia, if you are a Columbia Care shareholder, will enable the firms to accelerate toward the future. On its own, personally I would not buy into CCHWF stock. This stock is a bit too “slow” for me where I would want to find a smaller company with much more upside potential.
Nonetheless, and despite some current shortcomings in the margins, Columbia Care will achieve profitability shortly. With the assets, this is a company that could potentially do well.
I will speak more of this deal when I look at Cresco Labs.
Columbia Care CCHWF Financial Statements
Columbia Care CCHWF Stock Financial Statements
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