Verano Holdings VRNOF stock is one of my top picks. I wanted to add in the VRNOF stock forecast and update with the latest financial release. We are seeing a slowing of cannabis revenue over the past two quarters. This is something I figured would likely occur as more and more bars & restaurants opened back up; individuals not sitting at home consuming cannabis. Verano saw the same decline. However, expectations are for increased revenue for 2022, and onward. Given that that, I wanted to add in new revenue projections into the VRNOF stock forecast: the projection increased slightly from the previous projection.
Cannabis revenues are slowing somewhat, as I had mentioned. But, and as I had also mentioned, Verano Holdings looks to add higher revenues. Verano Holdings continues to add dispensaries and, this will continue to increase revenues.
Verano Holdings & Investing in the future
One thing we are learning continuously with investing in cannabis stocks is that this is not just one event, but a process of events that adds up.
Verano Holdings is acquiring other operators – Goodness Growth – and, that is going to mean expanding revenue. But, the real bonus becomes Verano Holdings hitting approximate 20% of revenue with CapEx expenditures. This will create future revenue. Getting a foot into all of the key markets such as Minnesota, New York, and New Mexico with the Goodness Growth deal, will enable Verano Holdings to check off boxes that get them to being one of the key MSO players.
But, there is an upfront cost; albeit likely temporary. If you move backward looking at metrics that Verano Holdings had, they were a top performer with some of the best metrics in the industry. While completing their expansion, Verano Holdings has taken on companies that were not as competitive with their respective metrics.
Verano Holdings Pushing Metrics
Management at Verano will likely push the acquired operators to improve metrics. For now, the drop in revenue is more in line with other cannabis operators. But, including Goodness Growth into the fold will increase revenue significantly. Then, the new Verano Holdings will be able to drive the metrics to better levels. And, being a larger cannabis company, Verano Holdings will also be able to raise more capital for more projects through working capital and other means.
Verano Holdings is increasing about 15% of revenue with changes in working capital over the past two years. If they continue with that, at that pace, you are dealing with a company that is generating a solid increases in changes to working capital.
Plus, with the approximate 20% of revenue in CapEx, expanding with new dispensaries, this will lead to further revenue gains.
Those dispensaries, with time, will continually grow organic revenue growth.
So, while there was a decline for this quarter in revenue, it was driven by outside factors that does not affect the overall picture for Verano Holdings. And, I believe these guys will continue to increase their revenue organically once the rate of growth moderates out of the post-COVID lockdowns to the endemic phase.
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Verano Holdings Financial Data
Verano Holdings Gross Profits
As mentioned, revenue declined. There were multiple factors that contributed to this such as Omicron lock downs and inflationary pressures. However, I also always like to point out that there was a big surge in revenue when COVID lockdowns initially started. Bars were closed. People were stuck at home. A lot of cannabis was consumed. No explanation is necessary.
Now, it may be that we are seeing a normalization of cannabis consumption that will be easier to gauge. Keep in mind, there are a lot of new dispensaries that are opening in a lot of states. This will enable processing facilities to scale up even more; lowering cost of goods and improving gross margins. These kinds of things are necessary to keep in focus when you are dealing with a growth stock that is just ramping up. Companies largely still need to grow into these facilities they are putting together.
Given that, looking at where Verano Holdings is, as they continue to open up more and more dispensaries, and continue to grow into their existing facilities, this ramped up production builds economies of scale. That will overcome certain costs and dilute cost per unit, improving gross margins.
Improving margins will really propel VRNOF stock in the long run.
Verano Holdings Operating Profits
As Verano Holdings grows into the new merged company with Goodness Growth, this will be one area where they can save money. That merger is not done yet. But, this is one thing I will key in on. In the meantime, the increase in operating costs still keeps Verano Holdings in the top of the list with operating efficiencies hitting about 37.5%.
However, that is still well above where these guys will be eventually. This is one of the key factors with a growth stock that is still ramping up: They will grow into existing costs. Operating efficiencies are closer to 17.5% for the broader stock market. This means that Verano Holdings will need to double their revenue – while keeping operating costs static – in order to be competitive with mature companies.
This is a key factor in these early stage growth stocks. And, this is something that you really want to key in on and keep track of. This is the slingshot that will drive VRNOF stock upward.
Verano Holdings EBITDA & Net Earnings
There was a small, negligible loss for the quarter for Verano Holdings of -$7M. This, after a far bigger loss the quarter before. This is transitory as Verano Holdings has already printed several quarters of profitability.
The 40% EBITDA/Revenue rate was lower than what Verano has printed previously and, this will change to the upside ina few quarters. Management at Verano Holdings knows how to perform. But, for now, they are building a business and dealing with shifting positions in the industry, including inflationary pressures & Omicron lockdowns.
Other cannabis companies are in the same position and some have fared well and others not so well. But, once the shifts in the overall consumer environment play out, with bars opening back up, with Omicron lockdowns ending, and with organic growth in existing dispensaries adding in, there will be more consistency. But, even that is going to be a challenge with new dispensaries opening up in rapid fashion.
Nonetheless, I expect a return to profitability quickly and as new stores open, increased revenue growth will add to top line revenue and bottom line profits.
Verano Holdings Cash On Hand
These bigger cannabis companies will not have much of an issue raising capital. And, if Verano Holdings returns to profitability quickly, this influx of cash can be put to good use with even more CapEx and expanding dispensary count.
It is a virtual foot race to get in to as many markets as possible and open as many dispensaries as possible. Verano Holdings is seeing positive initial success in New Jersey market and, being first to market in some of these places will be key.
Look for Verano Holdings to continue to utilized existing cash on hand for increased CapEx which, that is going to really play out big in the long term, something a lot of short-sighted investors will miss.
Verano Holdings Total Equity
Look for big increases in Total Equity over the course of this year and into next year. The amount of CapEx that Verano Holdings is spending will play out here as they build up capacity in several markets. And, with the acquisition of Goodness Growth likely to hit this year, there will be more increases in total equity.
Equity is that metric that creates the potential for revenue & profits. With the amount Verano Holdings spends relative to revenue, the future will be very big.
Verano VRNOF Stock Forecast
Verano Holdings VRNOF Stock DCF
| Assumptions | ||
|---|---|---|
| Tax Rate | 25% | |
| Discount Rate | 8.000% | |
| Perpetural Growth Rate | 25.0% | |
| EV/EBITDA Mulltiple | 50.0x | |
| Transaction Date | June 1, 2022 | |
| Fiscal Year End | 12/31/21 | |
| Current Price | $7.750 | |
| Shares Outstanding | 305,134,081 | |
| Debt | $1,056,000,000 | |
| Cash | $92,000,000 |
| Market Value | ||
|---|---|---|
| Market Cap | $1,830,804,486 | |
| Plus: Debt | $1,056,000,000 | |
| Less: Cash | $92,000,000 | |
| Enterprise Value | $2,794,804,486 | |
| Equity Value/Share | $6.0000 |
| Date | June 1, 2022 | Dec 31, 2022 | Dec 31, 2023 | Dec 31, 2024 | Dec 31, 2025 | Dec 31, 2026 | Dec 31, 2026 | |
|---|---|---|---|---|---|---|---|---|
| Time Periods | 1 | 2 | 3 | 4 | 5 | |||
| Year Fraction | 0.58 | 1.00 | 1.00 | 1.00 | 1.00 | |||
| EBIT | $285,000,000 | $356,500,000 | $406,250,000 | $525,000,000 | $656,250,000 | |||
| Less: Cash Taxes | $71,250,000 | $89,125,000 | $101,562,500 | $131,250,000 | $164,062,500 | |||
| Plus: D&A | $33,250,000 | $40,250,000 | $43,750,000 | $52,500,000 | $61,250,000 | |||
| Less: Capex | $95,000,000 | $115,000,000 | $125,000,000 | $150,000,000 | $175,000,000 | |||
| Less: Changes in NWC | -$142,500,000 | -$172,500,000 | -$187,500,000 | -$225,000,000 | -$262,500,000 | |||
| Unlevered FCF | 1 | $294,500,000 | $365,125,000 | $410,937,500 | $521,250,000 | $640,937,500 | ||
| (Entry)/Exit | -$2,794,804,486 | $15,581,112,132 | ||||||
| Transaction CF | - 0 | $171,791,667 | $365,125,000 | $410,937,500 | $521,250,000 | $640,937,500 | $15,581,112,132 | |
| Transaction CF | -$2,794,804,485 | $171,791,667 | $365,125,000 | $410,937,500 | $521,250,000 | $640,937,500 | $15,581,112,132 |
| Rate of Return | |
|---|---|
| Target Price Upside | 537% |
| Internal Rate of Return (IRR) | 54% |
| Market Value vs Intrinsic Value | |
| Market Value | $6.00 |
| Upside | $32.19 |
| Intrinsic Value | $38.19 |
Many analysts have begun downgrading Verano future revenue potential. But, until I downgrade the VRNOF stock projection I am going to watch to see how the rest of the year plays out with cannabis federal legalization as well as that Verano has stated they are going to ease back on CapEx spending. This will trickle in to the bottom line which would improve the overall VRNOF stock forecast.
Putting together the VRNOF stock forecast is a bit of a juggling act since there will be increases in revenue later but, there will also be a small decline in EBIT rates. However, this will all change moving forward as management at Verano guides the acquired companies toward improved metrics.
And, with future expansions playing out, Verano Holdings will continue to grow. They are starting to invest even more in states where there is likely to be a shift to adult-use legal (Pennsylvania). The CapEx they are doing will add continuous revenue potential for the future.
Given the shifts we are likely to see, as well as metrics for Verano, VRNOF has a lot of upside. I need to be prudent with looking at ratios and how Verano performs regarding adding what the outcome looks like.
I am going to have to continually update the VRNOF stock forecast as new data continues to come in. I will adjust the EBIT rates as they increase and decrease, and I will add in new acquisitions as they come in. Goodness Growth will hit very soon, and that will add a great deal to the top & bottom line.
Is Verano Holdings VRNOF stock a good investment
Investing is a popularity contest and, Verano Holdings, being one of the bigger stocks, will be a target by many in the future once cannabis federal legalization kicks in. Verano Holdings will garner a great deal of interest and, if VRNOF stock up-lists to Nasdaq, this will be a boon to trading volume. Factor in the potential earnings with revenue growth rate, VRNOF stock will get significant support.
On a percentage basis of revenue, CapEx expenditures for Verano are large. These expenditures will create massive future potential as Verano moves forward. I used an accelerated revenue increase for Verano Holdings over the next five years, and this will add in significantly.
Being that it is so large, and the framework of what Verano Holdings has done in the past, I see a lot of upside with VRNOF stock. Although I am softening the revenue outlook up front, there will be bigger gains down the road (Thsi is difficult to calculate within a DCF).
Nonetheless, I reiterate a big move updward with VRNOF stock.
Verano Holdings VRNOF Stock Financial Data
Verano Holdings VRNOF Stock Financial Statements
| December 2019 | March 2020 | June 2020 | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||
|---|---|---|---|---|---|---|---|---|---|
| Revenues | $24.3 | $42.8 | $75.0 | $64.4 | $74.0 | $143.3 | $198.7 | $207.0 | |
| Cost of Goods | $10.3 | -$4.4 | $32.0 | -$50.7 | $17.3 | $54.0 | $98.5 | -$15.3 | |
| Gross Income | $14.0 | $47.2 | $43.0 | $115.1 | $56.7 | $89.3 | $100.2 | $222.3 | |
| Gross Profit Margin | 57.6% | 110.3% | 57.3% | 178.7% | 76.6% | 62.3% | 50.4% | 107.4% |
| December 2019 | March 2020 | June 2020 | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||
|---|---|---|---|---|---|---|---|---|---|
| Revenues | $24.3 | $42.8 | $75.0 | $64.4 | $74.0 | $143.3 | $198.7 | $207.0 | |
| Total Operating Expenses | $8.2 | $9.0 | $20.0 | $11.8 | $19.7 | $32.1 | $57.8 | $36.5 | |
| Operating Income | $5.8 | $38.2 | $23.0 | $103.3 | $37.0 | $57.2 | $42.4 | $185.8 | |
| Operating Efficiency | 33.7% | 21.0% | 26.7% | 18.3% | 26.6% | 22.4% | 29.1% | 17.6% |
| December 2019 | March 2020 | June 2020 | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||
|---|---|---|---|---|---|---|---|---|---|
| Net Interest Expense | -$1.4 | -$3.9 | -$3.8 | -$4.2 | -$3.2 | -$1.8 | -$5.5 | -$8.1 | |
| Other Non-Operating Income | -$0.1 | -$0.2 | -$0.1 | -$1.6 | $1.1 | -$1.3 | $0.4 | -$0.5 | |
| EBT Inc. Unusual Items | $4.1 | $34.5 | $27.7 | $98.1 | $35.9 | $114.1 | $13.1 | $178.0 | |
| EBT Excl. Unusual Items | $9.1 | $34.5 | $27.7 | $98.3 | $35.9 | $114.1 | $12.7 | $178.0 | |
| Tax | $4.2 | $13.9 | $15.1 | $17.9 | $32.8 | $45.3 | $5.1 | $73.7 | |
| Earnings From Cont. Ops. | $4.9 | $20.6 | $12.5 | $80.5 | $3.1 | $68.8 | $7.6 | $104.3 |
| December 2019 | March 2020 | June 2020 | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||
|---|---|---|---|---|---|---|---|---|---|
| Net Income | $4.0 | $20.4 | $25.7 | $75.4 | $6.0 | $68.1 | $32.0 | $15.0 | |
| Diluted EPS | $0.29 | $1.35 | $0.04 | $4.75 | $0.37 | $0.27 | $0.03 | $0.33 | |
| Dividend Per Share | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | |
| EBITDA | $0.00 | $40.4 | $38.7 | $105.8 | $37.9 | $120.6 | $81.0 | $111.0 | |
| EBITDA/Revenue | 0.0% | 94.4% | 51.6% | 164.3% | 51.2% | 84.2% | 40.8% | 53.6% |
| March 2020 | June 2020 | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||
|---|---|---|---|---|---|---|---|---|
| Cash On Hand | $0.0 | $6.4 | $35.1 | $16.4 | $111.6 | $149.7 | $56.7 | |
| Free Cash Flow | $0.0 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | |
| Total Assets | $0.0 | $0.0 | $393.4 | $459.3 | $1,779.3 | $2,193.1 | $2,686.0 | |
| Total Liabilities | $0.0 | $100.0 | $164.4 | $216.6 | $515.1 | $708.6 | $519.0 | |
| Total Equity | $0.0 | $116.8 | $228.6 | $242.7 | $1,264.2 | $1,484.5 | $2,686.0 | |
| Cash Debt Ratio | 0.0% | 6.4% | 21.4% | 7.6% | 21.7% | 21.1% | 10.9% | |
| Book Value Per Share | $0.0 | $8.03 | $14.06 | $15.12 | $4.31 | $4.83 | 5.39 |
Thanks for the article, D.H.
How did you come up with a perpetual growth of 25%? How many years in the future does that cover in your model?
Hey Noah…
For revenue increases, I use a combination of both what analysts are projecting for the next couple of years for the individual stocks as well as the sector in general. The actual 25% metric I use inside the DCF does not do a whole lot with outcome. But, the inputs for actual revenue in each year, EBIT for those years, as well as other metrics such as CapEx, end up contributing a little more to the outcome of the DCF price target.