The Analyst
Pablo Zuanic, from Cantor Fitzgerald, kept Curaleaf among the firm’s top picks in the MSO group, with an Overweight rating and a price target at US$16.50.
The Thesis
Curaleaf will report December quarter results on March 3. Zuanic assumes the firm will also issue 2022 guidance, albeit the uncertainty around the timing of the start of recreational sales in NJ, CT and NY.
According to Zuanic, the company's wholesale growth of +30% in PA flower/vape (based on Headset data) may be one of the bright spots of the quarter.
“FactSet consensus is at $325 million for the fourth quarter of 2021, and we are at $320 million. So far, the first quarter of 2022 points to limited market growth; we are at $332 million sales vs. consensus at $350 million.”
Zuanic also noted that Curaleaf continued adding stores (127 at last count, second only to Trulieve), consolidating the industry and expanding its brand portfolio (deals with B Noble and Rolling Stone).
“With the MSOs attractively valued at these bottom levels (6x 2023 EBITDA on average), despite federal reform uncertainty, we are buyers of the more established and bigger franchise MSOs (like Curaleaf), taking a long-term view.” added the analyst. “The start of recreational sales in NJ (modeled for 4/1/22) should be the next main catalyst for the group. Curaleaf has claimed it is very well-prepared regarding capacity and inventories to absorb the expected increase in demand.”
Curaleaf’s Top Markets
Illinois: recreational and medical market up 2% sequentially in the fourth quarter (vs. +5% in 3Q).
Arizona: According to Headset the market was up 2% (it was down 5% in 3Q).
Florida: the company volumes fell 3% sequentially (+26% in 3Q).
Pennsylvania: the market was down 3% (Headset) after +1% in 3Q (note: Curaleaf’s wholesale flower/vape business was up 31% sequentially).
Massachusetts: the recreational and medical markets were down 2% (+11% in 3Q).
Michigan: the market was down 3% sequentially in 4Q vs. +10% in 3Q.
Maryland: the market fell 1% in 4Q (-2% in 3Q)
Nevada: was down 11% (Headset) after -8% in 3Q.
Is Curaleaf A “Good Operator”?
Commenting on the company’s track record Zuanic responded to investors who ask themselves whether Curaleaf is a “good operator.”
The analyst considered the question stems in part from the company’s lower margins. For example, Curaleaf guidance of 25% EBITDA margins for 2021 is below the estimates of 35% for Green Thumb (GTBIF, OW); and Trulieve (TCNNF, OW) with a proforma “in the high 30s.”
Another factor that drives investors to ask questions is the significant fall in Select vape market share in California (according to Headset, its market share dropped from 20% in 2018 to 5% in 2021). Likewise, sales per store are well below Trulieve in Florida (one of Curaleaf’s main markets) at 625K oz of flower per store per month compared with 1mn per store per month for Trulieve. “In non-flower volumes, this is 1.36mn mg for Curaleaf vs. 2.37mn for Trulieve,” added Zuanic.
That said, Zuanic explained, "The ‘good operator’ question is not reflected in the valuation, with Curaleaf consistently trading above the peer group. We think that premium correctly reflects the company’s superior footprint (23 states, 127 stores), depth in most states (it claims a #1 or #2 position in most of its markets), a stronger balance sheet, and ability to quickly innovate and roll out new brands and formats across its national footprint,” Zuanic concluded.
