Curaleaf Holdings: Why their star continues to shine

In a year of mega gigundo stock price performance, Curaleaf Holdings (CURL) stands out. How about owning a stock that has increased 108 percent in the last three months. That is a 432 percent appreciation on an annual basis. And, that is without the benefit of compounding. So how and why did this all happen?

CURL’s recently released financial report helps explain. Full year revenues quadrupled to $77 million. The increase in the final quarter of the year was a five-fold monster at $32 million. True operating losses also took a monster leap to $29 million, but gross profitability improved to nearly 55 percent from 19 percent in 2017.

It is important to remember that CURL operations are U.S. based, so the Canadian legalization in October played no meaningful part in these results.

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In conclusion, most cannabis companies must be viewed as a publicly traded venture capital investment. In the short run, the two most important measures from the income statement are the rate of revenue growth and the ability to sell products at a healthy gross profit. Building strong operational support is critical for long term success, and that takes lots of operating cash flow. In 2018, CURL successfully addressed both issues.

Pretty much the same can be said when reviewing the year-end balance sheet data. CURL's bank account held $266 million. In a static environment, there is enough liquidity to last about two years. One reason for this is the $400 million private placement accomplished last October. At total year-end, assets stood at $606 million against total liabilities of only $132 million. Just about any company would be pleased with these numbers.

The announcement heard round the world

To say the March 20 earnings release was well received would be a rather substantial understatement. Since then the price of the stock has shot up nearly 30 percent. What was included in the earnings announcement was the trigger.

Management boldly provided guidance that 2019 revenues would hit $400 million. There was a list of things that need to take place for the projection to occur, but none were extraordinary. This is what’s driving the stock, absolutely no question.

Drilling down

Headquartered in Wakefield, Massachusetts, Curaleaf presents itself as the largest vertically integrated company. The company operates 44 dispensaries in 12 states, 12 cultivation sites, and 10 processing sites.

Thus far, their focus has been on highly populated, limited license states, like Florida, Massachusetts, New Jersey, and New York. Slightly more than half of the Curaleaf dispensaries are located in Florida (23).

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Only recently has the company entered California, so there is still a lot of legal territory to cover. Products cover both the medical and recreational market with brands that include Curaleaf and UKU.

Confidence based on their record

Management’s $400 million revenue projection may appear overly confident, but their accomplishments give them the benefit of the doubt. To begin, the stock has consistently outperformed its peers in every month this year. None of the biggest cannabis names can match this performance.

Based on trailing year revenues, it remains one of the lowest priced stocks in the group.

Here are some numbers to consider. CURL is selling at 87 times its sales in 2018. Based on management's 2019 projection, the price to sales ratio drops to just a bit over 10 times. Results for CURL compare favorably to peers like Tilray (TLRY) at 151 and Cronos (CRON) at 245 times. Only $15 billion market cap Canopy (CGC) comes close at 94 times sales.

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Cronos and Canopy have the considerable advantage of having deep-pocketed partners in Constellation Brands (STZ) and Atria (MO). But CURL hasn’t been sitting still either. During the March conference call with Wall Street analysts, the company announced an agreement for pharmacy giant CVS to sell CBD products in 800 CVS stores in states where sales are permitted. (There are 9800 stores nationwide).

Wall Street likes what it sees

So investors in CURL are a happy group these days, but what about the future? Management’s outlook for 2019 is not being ignored by the five Wall Street firms covering the company. Over the past three months, there have been four upgrades to “buy” with a one-year price target of $15.

For all those bean counters, that is a further 50 percent increase in the stock price. Say what you will about the reliability of Wall Street analysts, but that is a significant upside. So keep your eyes on Curaleaf Holdings. Its star is continuing to rise. FYI: on February 19, Curaleaf began trading on the US OTC market.

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