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Verano Stock: Q1 2022 Earnings Indicate A Buy (VRNOF)

Marijuana Drug Dealer

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The official launch of New Jersey recreational cannabis sales should have the market excited about multi-state operators (MSOs). Verano Holdings (OTCQX:VRNOF) is one of those MSOs set to benefit from the unlock of massive cannabis volumes in Northeast markets. My investment thesis remains bullish on the stock with the unlock of value from New Jersey and the New York license in hand.

Q1 Struggles

The whole cannabis sector struggled during Q1’22 due to the tough comps boosted by stimulus checks last year and the Omicron shutdowns during January and February. Verano was no exception with revenues down over $9 million from the solid December quarter.

The MSO continues to produce impressive gross margins above 60% while EBITDA mergers are strong at 40% of revenues. My one major complaint about Verano was the company potentially under spending on brand marketing during this early period of retail expansion where limited licenses reduce the need to advertise.

The company has spent more on SG&A in the recent quarters with these cots now at 27% of revenue levels, up 2 percentage points from the Q4’21 level of 25%. The company claims the higher expenses are from entering new markets and increasing marketing initiatives, but Verano doesn’t break out the financial details in the MD&A.

Verano now leads the large MSO sector with the top EBITDA margins for Q1’22 as follows:

  • Verano – 40%
  • Curaleaf (OTCPK:CURLF) – 23%
  • Cresco – 24%
  • Green Thumb (OTCQX:GTBIF) – 32%
  • Trulieve (OTCQX:TCNNF) – 33%

Verano has 47 stores in Florida making up a large part of the retail footprint of 116 locations, which includes the locations from the pending acquisition of Goodness Growth Holdings (OTCQX:GDNSF). Unlike Trulieve Cannabis with a dominant focus on Florida retail locations, Verano is poised for growth in the Northeast from their New Jersey stores launching recreational cannabis on April 21 and the Goodness Growth license in New York.

Footprint slide

Source: Verano Q1’22 presentation

The MSO already has the industry leading margins before entering these massive market opportunities. A market like New Jersey requires a sizable amount of spending to build up operations before launching recreational cannabis services and the view was that the state would begin operations long before mid-April.

Verano should be able to maintain or grow margins based on the massive sales volumes in these states, though one needs to be cautioned that Goodness Growth currently has negative EBITDA margins. The company guided to 20% margins for the year before launching New York recreational cannabis next year, but the amount will impact Verano margins.

Incredible Value

As with a lot of MSOs, Verano now trades at an incredible value for a growth company with large adjusted EBITDA margins entering another growth phrase. As a standalone company, the MSO is expected to see revenue jump to $963 million this year and reach nearly $1.3 billion next year.

Chart

For a stock with only a $2.4 billion valuation, the valuation equation is rather remarkable. The launch of recreational cannabis in New Jersey, especially with the launch of a 3rd store in Jersey Shore sets Verano up to test the upper limits of the revenue estimates.

The deal with Goodness Growth provides major upside to those growth estimates at a cost of only $413 million. The MSO already has a $60+ million revenue run rate with flower sales in Minnesota’s medical markets and adult-use sales in New Mexico pushing the total business up to $100+ million. The whole New York business is a bonus with revenues easily topping $200 million in 2023 on an early year launch of recreational cannabis, though unlikely.

Verano has the potential to reach 2023 sales of $1.5 billion while the market cap is just $2.7 billion. At even just 35% adjusted EBITDA margins lowered for the addition of Goodness Growth and more SG&A spending, the MSO would produce $525 million in adjusted EBITDA and trade at close to just 5x targets.

The company now has net debt of $240 million, which isn’t exactly ideal in a rising rate environment. As with other MSOs, the net debt levels are covered by adjusted EBITDA limiting the risk, but the market isn’t very forgiving right now.

Takeaway

The key investor takeaway is that Verano trading below 5x 2023 adjusted EBITDA targets is almost a crime. The stock isn’t priced for the growth potential over the next few years as recreational cannabis sales launch in crucial Northeast markets like New Jersey and New York.


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