As announced last week, four significant Canada focused public cannabis companies are to report earnings and issue other reports, especially post-legalization commentaries --- Aurora Cannabis Inc., Tilray Inc., Cronos Group Inc., and Canopy Growth Corp. The primary purpose of the reviews was to demonstrate that the four major public cannabis companies have questionable business plans and were structured to fail. We believe that was not the agenda, but since large sums of money was given to them “carte blanche” the companies merely over-capitalized their business configurations. The results are excessive market capitalization and continual dilution of equity. Over the near and long-term, their core business plans cannot create sufficient net cash flow and return of capital to shareholders and creditors. Therefore, they are grossly overvalued. Our detailed “numbers” presentations in the individual reports under the Four-Part Series justifies our concerns.
Our intent was not to present the research as a financial advisor or a recommendation to buy or sell these companies, but to understand the dynamics of the cannabis industry, to evaluate various business models and to observe how and why the industry and the public companies involved have evolved into the current state. The data collected has proved available to Flashlight Bankers Inc. , and elected to share its findings.
value before earnings valve after earnings
AURORA CANNABIS INC. (ACB) $ 7.19 6.35
TILRAY INC. (TLRY) 109.54 101.02
CRONOS GROUP INC. (CRON) 8.12 7.91
CANOPY GROWTH CORP. (CGC) 38.48 34.03
FIRST LOOK AFTER EARNINGS WERE REPORTED
AURORA CANNABIS INC. (ACB): With a market canalization of $6.86 billion and a debt to equity of 13. ACB is valued too high for what the business is worth. The “enterprise value” of $7.44 billion appears overstated with the forward earnings, and leveraged cash flow suggests ACB would need to increase years sales by a factor of 5 times to show a profit. That event is not possible in the next seven years since ACB would require a capital infusion of $1.1 billion. Whether available by further stock sales or loans, the number is higher than the intrinsic value of the company. With 960 million shares outstanding, book value of $2.06 per shares and $152 million in debt, ACB overvalued. As the numbers indicate, Aurora Cannabis Inc. represents a business profile that appears faulted.
TILRAY INC. (TLRY): The numbers speak for themselves: Book value below $1.00 per share, 78 million shares outstanding with a 10 million share float suggests stock liquidity is marginal at best and the company's demands for more capital, the dilution factor will create weaker stock prices. Without true earnings in sight, TLRY looks like a giant wave about to collapse.
CRONOS GROUP (CRON): CROM has a $1.45 billion valuation with revenue of only $6.96 million. With negative cash flow, CROM is a risk that should be avoided. As for profits with its current business model – it will never happen.
CANOPY GROWTH CORPORATION (CGC): The growing, possession, and sale of medical cannabis is not a long-term business model to warrant further investment commitment. If you purchased CGC in the $20 range (near the 52 week low) as suggested, the current value should be a good reason to a SELL. With a market capitalization of $11.59 billion (that’s right BILLION), and leveraged Free Cash Flow $ -234.94 million, CGC is overpriced and overextended. It is a business model that will not work in the current environment.
Our analysis was presented to highlight the direction of the cannabis industry from the perspective of capital raising and their business plans to attract investor commitments. Naturally, investors enthusiasm was the culprit, especially with the noise of a $50 billion cannabis industry. Hemp legalization is sweeping over North America – 10 states plus Washington, D.C., have all legalized recreational versions over the last few years, and full legalization came to Canada in October 2018. Experts claimed that legal pot was worth $10 billion for the U.S. in 2017 alone, and have projected the U.S. industry to skyrocket to $50 billion by 2026. Indeed, investors paid attention. With disconcertingly high valuations, it is time to access the facts.
A free copy of Folder R12-1115 is available upon request. Before you consider investing in cannabis-related public companies, R12-1115 is a must read.