MedMen has been a stinking cannabis stock

In a market of skyrocketing cannabis stock prices, MedMen (CSE:MMEN) has been a dud. So far this year while major cannabis indices and ETFs have risen better than 50 percent, the price of MedMen shares have been dead money: flat, keput, nada. The stock that stood at a lofty $7.57 during last October’s mania, now stands at only about $2.76.

Why should anyone be interested in such an obvious loser like MedMen? For starters, the seven analysts that follow the company have a price forecast of close to $6. This, obviously, is more than a double from recent price levels. Try to name another billion-dollar-plus market cap company in the cannabis business with that much near term upside: pretty much impossible.

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Of the multitude of cannabis companies chasing the dream of market dominance, someone is going to grow to retail dominance. Think of the Starbucks of cannabis sometime out in 2030. Today the greatest value may be placed on productive capacity, that will only last so long. Ultimately the distributors and retailers are where that greatest value added will occur. 

Whatsup with MedMen?

MedMen already owns the biggest footprint in the U.S. retail cannabis market. Right now that spells CA where 80 percent of their business is concentrated. For the record, MedMen accounts for 7 percent of the market. They are growing in the Golden State, more than twice the rate of general consumption, so that is a healthy sign.

As of the recently reported Q2 ending December, the company was operating 19 “facilities” in the following locations: Arizona, California, Florida, Nevada, and New York. This data point won’t last long. Plans call for 16 new stores to be opened in the coming quarters.

Some 12 of these will be located in Florida where MedMen holds licenses for a total of 30 locations. So between a thriving business in California and new store expansion, it doesn’t take much to see how quarterly revenues, currently running just under $30 million could increase sequentially another 25-50 percent in the near term. This, however, excludes acquisitions.

Back in Q2, the company snatched up Pharma Cann. Without going into detail, the acquisition more than doubles MedMen’s presence to 12 states. Along the way, the company also acquired an existing MedMen store in Orange County CA. 

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Then on February 12 came the acquisition of Kannboast Technology for $33 million in stock. In addition to bringing on two retail locations in Arizona comes a small 25,000 square foot cultivation and production facility.

Respectable gross profitability

In the short run, while the industry is in a rapid growth mode, perhaps the second most important financial measure is gross profits. Is the company selling products for more than its costs? MedMen is doing ok on this score and showing improvement. In Q2 GM amounted to 53 percent up from 45 percent in Q1. 

Operating cash flow is negative 

The most important financial measure is cash flow. Like most cannabis companies, rapid expansion translates into negative operating cash flow. At MedMen this amounts to roundly $127 million. This is in spite of stock being used for most acquisitions. This condition is not going to change anytime soon.

The company could issue additional equity to the public but is taking a slightly different course. It has in place a deal with Treehouse (a cannabis real estate REIT) that will finance the company’s dispensary expansion at least for the coming year. However, that may not cover all operating cash needs. So a public equity placement cannot be ruled out.

Valuation measures

In recent days Ralph Nathan over at compared MedMen with market giants Acreage Holdings (ACRGF), Aurora Cannabis (ACB), and Canopy Growth (WEED). Using a measure of Enterprise Value to Sales found MedMen was priced 1.19x as respectively compared with 2.43x, 13.66x and 21.95x for its peer group. There is a message here that is hard to ignore.

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All is not perfect in the Culver City CA headquarters of MedMen but hardly the stuff to do irreparable damage. The company got caught by OTC Markets for making certain promotional statements that crossed the regulatory lines. On March 4 an explanation was offered by the company with enough legal language to confuse a securities lawyer. In the final analysis, this can be dismissed as little more than a legal faux pas. 

There are no doubt additional factors to consider with MedMen, but the key financial evidence stacks up to a pretty favorable situation. As always, I do not own any MMEN shares nor is anyone paying me to say nice things. 

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