Verano Holdings VRNOF stock may be one of the most undervalued marijuana stocks you can buy. When you look at the numbers and you compare what Verano earns versus the broader S&P 500, you see that this stock is very undervalued. By my calculation, there is a potential 500% upside opportunity in the stock should cannabis stocks be valued at the same metrics as other stocks.
To be sure, though, the markets are not going to ignore profits forever. The entire purpose of market participants is to pursue these profits. At some point, the market is going to catch on to what is happening in the cannabis market and buy into these opportunities.
Let me break down what I am looking at for Verano.
Verano VRNHF Stock Comparison
Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:
- #10 Market Cap: $1.6B
- #53 Revenue Growth Rate: 4.2%
- #12 Gross Margins: 64.3%
- #3 Operating Efficiencies: 15%
- #1 EBITDA/Revenue: 53%
- #67 Cash/Debt Ratio: 10%
- #3 Total Assets: $2.68B
The broader stock market is seeing about 22.5% for EBITDA versus revenues. The #1 slot for Verano is close to 150% more than what the broader market is keeping. This is significant and needs to be highlighted. But, there are many more metrics that I will be focusing on.
In addition, I am going to present the future outcome for Verano for the next four quarters.
Verano VRNHF Stock Financial Data
I wanted to break down the financials right now and then show what the stock could be doing in the next few quarters.
There was a slight 4.1% increase in revenue QoQ:
What we are seeing right now is more like the organic growth we need to see from the current foundation. 4.1% increase in revenue growth is very respectable for when you look at the S&P printing about 3.41% revenue growth rate. So, any mis-aprehension by the market that there was a slight drop in revenue is only looking at the top headlines and not digging thoroughly.
As I mentioned, I am putting together a projection at the bottom. I am using an approximate 5% revenue increase QoQ for the next four quarters. But, Verano has already announced even more acquisitions and this number is low. That simply means the numbers I provide are likely to be on the low side.
Verano still has a ways to go as they grow into their current facilities. Plus, they are in the process of expanding new facilities and acquiring yet others. They will continually be able to grow into capacity for some time. For now, they are printing some top-tier gross margins.
It should be noted that the S&P 500 prints roughly 55% gross margins on average. With the 65% print, Verano is easily outperforming the broader market.
The #3 print for operating efficiencies is excellent:
In my projection, I used a higher number of 30%. Verano has not printed operating costs at 30% of revenue in two years. But, I wanted to keep this in line with the base foundation of the bigger cannabis stocks.
Given the operating efficiencies, Verano could easily add operating costs in sales and still be sitting at an excellent level. This would hopefully increase sales and be worth it.
And, again, the S&P 500 prints roughly 40% operating costs relative to the revenue. Yet another metric that Verano outperforms the broader market by a very long shot.
At 53% of revenue, EBITDA is sitting at the #1 level when you look at all other cannabis companies:
The core business is keeping more and more of the revenue it earns from sales of products. When you factor in one of the lowest operating costs, Verano may be outperforming all other stocks by a long shot.
Here is one metric that seems to bounce around a bit, but this has more to do with CapEx, M&A, and other outlying activity that has nothing to do with the core business:
The past four quarters have printed some $121M in net earnings. Off of 319M shares outstanding, that is an EPS of $0.379. If you factored in a rate of 100x future earnings, VRNOF would have been bought up to about $37.90. But, the market high was all of $28.00 for VRNOF.
An investor would have been able to purchase this stock well below its run-rate and earnings potential with a significant amount of margin of safety in the investment.
Even more, given future revenue and earnings, the stock is well below its valuation levels.
Cash On Hand
Verano has enough cash on hand simply because it is net earnings positive:
At the same time, Verano has the ability to borrow some $110M for running operations and doing M&A deals. Still, they would not need to do this simply because there is enough cash available to run the business. And, since Verano is net earnings positive, they have no real problems with access to cash.
Verano Holdings has very little debt. Simultaneously, with the low cash level, they also have the ability to borrow what they need should they need to; they have an ultra-low interest rate credit facility:
Without a lot of debt, the fact they have a low amount of cash washes out. Factor in the ability for Verano to borrow when they can, their position is solid for advancing the companies stated goals.
There was a big jump in equity after some acquisitions earlier:
As I always state, assets are the engine to drive future growth in revenue and, by extension, profits. The big jump puts Verano Holdings in a solid position relative to its market capitalization, cash position and capabilities, and its revenue and profit potential.
Verano VRNOF Stock Chart
While we have seen some nice moves upwards in the most recent trading days, cannabis stocks are still very low comparatively:
I am hopeful, along with every other investor in cannabis, that we have seen the bottom of the latest selling in cannabis stocks.
But, I look at this as an opportunity, more than anything. Look at the valuations you would receive if you bought the broader S&P 500 market. Then, compare that to the current stock price Mr. Market is offering cannabis investors with VRNOF. This is an excellent opportunity. And, the margin of safety is much greater than the S&P 500.
Plus, there is the future potential of this stock that I like the most.
Is Verano Holdings VRNOF Stock a Good Investment?
Verano Holdings just printed about $207M. My expectation is that they print about $1B over the next four quarters to include Q4 2021, and the first three quarters of 2022 (Note: We do not have guidance for this and I expect revenue will actually be higher than just $1B).
Given the 35% cost of goods Verano consistently prints, with a modest 30% in operating costs (double what they just printed of 15.5%), and a 10% continuing cost which is about the norm for the industry, Verano has about a 75% cost of revenue for net earnings. This is about a 25% net earnings percentage, about double the S&P 500.
At $1B in revenue, that is $250M in net earnings. There are 319M shares outstanding. With the shares outstanding and the net earnings, you are looking at some $0.784 EPS over the next year on $1B and modestly comparative margins.
At a 100x future earnings, a multiple that may be low for a company with such excellent metrics, this puts VRNOF stock at $78.40 per share. Mind you, I doubled the operating costs for this projection: Verano has not printed such high operating costs relative to revenue in over two years. Plus, I used 10% continuing costs. Verano has very little debt. Given that, the 10% is likely to be high, also.
This stock could easily be much higher if the stock market would value VRNOF earnings the same way it values the broader market.
The stock market will not ignore profits forever. I expect we will see movements higher.
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