Cannabis Federal Legalization Via Biden Reclassifying cannabis.
As far as cannabis stocks go, Harvest Health is a solid company operating in growing markets. The multi-state operator has key operations in Arizona, Pennsylvania, Maryland, and Florida as well as California, Colorado, and Utah (After having divested its locations in North Dakota). Harvest Health reported 13% QoQ gains. But, more importantly, they offered future guidance which will be the basis of how I look at this company. After opening all of their remaining dispensaries and with Arizona flipping to adult-use recreational cannabis, future guidance for this year’s revenue is stated at $380M. This will drive Harvest Health Stock HRVSF up some 200%.
Given the metrics of this company, the growth that they will achieve, I wanted to break down the financials and show how Harvest Health is on a run-rate that would put the stock at $9.00 over the next 12 month period. One thing to keep in mind about this multi-state operator is that its flagship operations are in Arizona where the state just switched to adult-use recreational cannabis. Revenue growth in Arizona will be very high.
Note: Harvest Health HRVSF stock was acquired by Trulieve TCNNF stock
Look here for TCNNF stock information.
TCNNF stock update
For now, here is a look at HRVSF stock:
There was considerable buying of cannabis stocks at the beginning of this year. For a large majority of these stocks, the valuations were out of line with the stock price given earnings potential. Reality is starting to set in and more recently there has been selling in the general stock market and cannabis stocks. This is offering an excellent buying opportunity for some cannabis stocks. I believe that Harvest Health stock is one of the best cannabis companies to buy.
Harvest Health & Recreation Revenue
Harvest Health has been increasing its footprint in key areas with just a couple more stores to go. In the meantime, here is a look at the most recent revenue release:
Harvest Health revenues have been continually increasing in a steady manner. But, they also offered future guidance for the upcoming year. There is to be a large increase in the very next quarter. This is driven by new dispensary openings as well as Arizona’s switch to adult-use cannabis.
Management at Harvest Health & Recreation guided for $380M in total revenue. They also stated that next quarter’s revenues should be approximately $85M. I’ve put together a chart for the next four quarters that include the revenue increases showing future guidance:
This chart shows what next quarter’s revenue increase looks like along with the following three quarters given the total projection. I’ve used a progressive QoQ increase. This keeps in mind gradual growth. And, this also adheres to total guidance.
The revenue increases should have a direct effect on margins and costs. And, I wanted to break down current margins as well as future margins.
Current gross margins were affected by costs outside of normal operations and that effect drove down profits for the quarter:
The costs incurred were one-offs. Prior to that, Harvest Health & Recreation had solid margins. As it turns out, from all of the cannabis companies I have scrutinized, dispensaries tend to have some of the best gross margins. The best companies that I look at typically produce 35% – 40% cost-of-goods. This gives gross margins of 60% – 65%. Harvest Health was right in the middle-ground of this range.
It may very well be that they can push gross margins up more throughout the year. My projections put Harvest Health margins back on track to their higher levels. The run-rate I have for Harvest Health stock $HRVSF is for this year. Beyond this year, I expect cannabis stocks to slow their run rate and therefore my future earnings multiple will be lowered.
Harvest Health & Recreation Total Operating Costs
One of the metrics that management talked about in their latest earnings release was total operating costs. Management stated that they were going to be diligent in keeping this metric in check. Here is the latest chart on operating efficiencies:
From a comparison perspective, this is not near the best levels. First, for the uninitiated, total operating costs deal with those costs associated with running the business. This is outside of the costs directly related to producing the product. This has more to do with administrative costs as well as rent on facilities, and such.
Harvest Health Sales General & Administrative
There was an outsized increase in SG&A in the latest quarter and this drew the scrutiny of the CFO. Increasing Sales, General & Administrative costs are inevitable when a company grows. The key for a company is to have these metrics grow at a slower rate, if but marginal.
At the same time, it is all mathematics. For instance, the monthly rent on a dispensary is the same regardless of that store sells $1M in a year or $10M in a year. Some of the predictions for Harvest Health are that all cannabis companies will be selling about $15M in all of the dispensaries in Arizona. This is a significant increase over the current pace. But, this is what happens to cannabis sales when a state switches to adult-use from medical only.
Given the mathematics of total operating costs, as the stores that are just opening begin to bring in revenue, total operating costs will decrease (The chart above). This was also in the guidance that management offered.
One of the first major hurdles for a cannabis company to achieve is EBITDA profitability on a consistent basis. Harvest Health was starting to print EBITDA profitability. But, the latest quarter turned back around:
I have looked at the metrics for future guidance and my expectation is that Harvest Health will hit EBITDA this year consistently. However, this does not take into consideration costs associated with opening new stores or any kind of acquisition that may occur. This is one of the difficulties in following cannabis stocks: There are always unexpected costs in the earlier stages.
Nonetheless, my expectation is that Harvest Health will be profitable. And, keeping with the guidance and earnings call, management will invest in new projects they feel will expand Harvest’s footprint in an industry that is growing rapidly.
Is HRVSF Stock A Good Buy?
I wanted to put together a base-case scenario for Harvest Health and show where I think the $HRVSF stock could be by year’s end.
First, management gave us a revenue run-rate of $380M for the upcoming year. We were also given a projection for the next quarter of about $85M which allows us to normalize future revenues over the next three quarters.
But, what about margins and costs?
I expect that Harvest Health will be driven back towards its normal gross margins over the course of the next 4 quarters. This puts them back into a range of 60% – 65%. Then, total operating costs will very likely be outpaced by new revenues being generated in stores that have just opened. I am looking for 40% – 35% in total operating efficiencies.
Then, with continuing operations, if Harvest Health can continue to keep costs pushed downward, then net incomes will hit the projections outlined:
- ~$380M Revenues
- ~37.5% Cost of Goods: $141.5M
- ~35% Total Operating Costs: $131M
- ~10% Continuing Costs: $38M
- Net Profits: $69M
- 650M Shares outstanding
- EPS: $0.1061
Given these variables and a 100x future earnings multiple, EPS will be $10.61. The run rate on this will have already begun since this is guidance.
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