Recent research conducted by Viridian Capital Advisors reveals that the cannabis sector requires more capital as compared to other similar industries.
The findings offer a unique perspective into the challenges the cannabis industry faces, especially considering the potential for federal legalization and the subsequent acquisition of interest from other sectors.
Scott Greiper, president & founder of Viridian Capital Advisors, will be a featured speaker at the upcoming Benzinga Cannabis Capital Conference in Chicago from September 27-28. Expect him to delve into this crucial topic during his presentation.
Breakdown of Companies Surveyed
For this research, Viridian chose to evaluate the capital needs of the cannabis industry against four potential acquirer sectors in the event of federal legalization.
Here's a breakdown:
- Cannabis: Includes nine multistate operators boasting market caps exceeding $100 million.
- Tobacco: Comprises British American Tobacco BTI, Altria Group Inc MO, Philip Morris International PM, and Japan Tobacco JAPAF.
- Alcoholic beverages: Encompasses ABEV ABEV, Brown-Forman BF/B, Constellation Brands STZ, Diageo DEO, and Molson Coors TAP.
- Pharmaceuticals: Features giants like Johnson & Johnson JNJ, Pfizer PFE, Merck & CO. MRK, and Eli Lilly (NYSE: LLY).
- Consumer products: Colgate Palmolive CL, Mondelez MDLZ, Proctor & Gamble PG, and Unilever UL, per Viridian's report.
Viridian elaborated on its methodology, stating that the capital intensity of each group was calculated by the aggregate "next 12-month consensus revenue estimates divided by aggregate capital employed (book equity + total debt – cash)." To put it simply, “the lower the bar, the more capital the industry needs to generate $1 in sales,” wrote co-founder, and executive editor of Green Market Report, Debra Borchardt.
Insights From The Report
Frank Colombo, a Viridian analyst, stressed the importance of these findings. “The capital intensity issue is a big one for cannabis,” he noted.
Though some operators might argue that recent significant investments will facilitate long-term growth without much need for additional capital, the consistent data across the group suggests otherwise. “I have also used forward 12-month sales to account for this. The idea is that your capital comes ahead of your sales,” Colombo explained.
The fact that cannabis remains a federally illegal product in the U.S. has significantly contributed to these capital challenges. Multistate operators (MSOs), as highlighted in the chart, have to maintain overlapping operations because their products cannot move across state lines. This restriction has inadvertently led to inefficient businesses, resulting in them spending more than their counterparts in legally compliant sectors.
However, hope is on the horizon.
“The good news, as I tried to point out, is that when and if interstate commerce happens it will help this issue significantly,” said Colombo.
If cannabis becomes federally legalized, these operational costs could decline, allowing MSOs to centralize their operations and thereby eliminating redundancy.
Despite these insights, there's a palpable challenge for cannabis companies. Many are struggling with mounting debt and the pressing need for more capital as well as access to willing investors. “The capital shortage matched with capital intensity makes rapid growth impossible,” Colombo concluded.
The cannabis industry's future is at stake and federal legalization could be the game-changer. If you want to delve deeper into these topics consider joining us at the Benzinga Cannabis Capital Conference in Chicago on September 27-28. All information is available on bzcannabis.com
Image by El Planteo
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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