Industry analysts Cowen and Company initiated coverage on several US multiple state operators this morning, putting out a 170 page report on the matter. In particular, the equity research firm initiated coverage on five US focused firms, which include Curaleaf Holdings (CSE: CURA), Green Thumb Industries (CSE: GTII), Cresco Labs (CSE: CL), Acreage Holdings (CSE: ACRG.u), and finally Medmen Enterprises (CSE: MMEN). The latter of which, it did not provide a rosy picture for.
Key in Cowen’s research and thesis model, is that they were focused on firms that are centered on a consumer packaged goods finished goods model. The basis is that CPG finished goods have a superior margin than that of simple retail or wholesale sales strategies.
Commenting on the CPG finished goods strategy as a whole, analyst Vivien Azer stated, “Our analysis indicates that average CPG gross margins are ~20 pts higher than the average margins seen for specialty retailers. While the CPG category generates margins of roughly 55%, we would note that the average for asset light consumer branded industries such as beverages and tobacco have far higher margins, averaging 60% and 62%, respectively. The reward for this type of superior profitability has showed up in valuations, where industries such as beverages and tobacco historically trade at ~6.5x FY2 revenues (vs. 1.6x for specialty retail and 0.6x for traditional retail).”
Additionally, Cowen was also focused on firms providing depth in the states in which it operates, versus focusing on a breadth strategy that results in poor penetration in key markets and funding that is then spread far too thinly.
As a result of their model, the firm has set the following targets and ratings for the recently initiated firms. All price targets are in USD.
- Acreage Holdings – Market Perform – Price target: $9.00
- Cresco Labs – Outperform – Price target: $14.00
- Curaleaf Holdings – Outperform – Price target: $10.50
- Green Thumb Industries – Outperform – Price target: $18.50
- Medmen Enterprises – Underperform – Price target: $1.50
While current price targets leave little room for share price appreciation on equities such as Acreage Holdings and Curaleaf Holdings, the standout in terms of rating and price targets is that of Medmen Enterprises and their $1.50 per share price target. Given that the equity closed yesterdays session at $1.98, it’s certainly a cause for concern among shareholders.
Chief among the cited issues with Medmen, is that of the cash burn the equity goes through as well as the departure of key executive personnel over the last year. Cowen states that the firm has become too dependent on the capital markets for financing, and that it expects the issuer to have to receive further funding, despite the Gotham Green infusion, within the next year.
The reality is that MMEN continues to burn through its coffers and its adjusted EBITDA losses significantly exceed peers, many of which are at an inflection point in terms of profitability.
Cowen and Company also cited current revenue mixes across all jurisdictions in which Medmen operates as a key reasoning for the price target, given that California currently represents 73% of Medmen revenues. Other multi state operators have a “more balanced revenue profile.”
Cowen and Company indicated that Green Thumb Industries is their “highest conviction” operator, citing a healthy 52%/48% sales mix of retail and wholesale, as well as well positioned retail sales operations in several key states including Illinois.
Information for this briefing was found via Cowen and Company’s equity research. The author has no securities or affiliations related to the discussed organizations. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
