‘Massive, unsustainable’ value gap between Canadian, US cannabis firms, analyst notes

Marijuana companies focused on the United States face “massive and unsustainable” valuation discounts relative to their Canadian counterparts, according to a new report.

As of this week, companies with an operational focus on the United States are trading at about 13 times consensus estimates for their 2020 earnings before interest, taxes, depreciation and amortization (EBITDA.)

That represents a 56% discount to the 30 times average for companies focused on Canada, according to Toronto-based Beacon Securities.

And that’s months after cannabis capital started “rotating” away from Canada to the United States, CIBC World Markets analyst John Zamparo said at the time.

The Beacon report noted that U.S.-focused companies have a much larger addressable market than marijuana companies looking to capitalize in Canada.

“They can also offer broader product suites and can participate more fully in the supply chain, which should translate to more sustainable business models with better margin potential,” according to the Beacon report.

The authors concluded that “change is inevitable” as far as marijuana remaining illegal in the U.S..

The Beacon paper said investors in U.S.-focused companies are able to choose between multistate operators and others specializing in coveted markets.

The two major structural advantages the U.S. offers companies over Canada are:

  • Product breadth: Additional product forms – edibles, extracts and topicals – will be in short supply in Canada until sometime in 2020, after being permitted later this year.
  • Supply-chain participation: Most major markets in Canada (except Quebec) now allow some degree of private-sector retail ownership, but the distribution business is still largely government-controlled, meaning provinces play a large role in setting market prices, and margins, in the regulated industry.

“The U.S. market offers investors multiple, major advantages over the Canadian market,” the report noted.

“Nonetheless, there is a massive valuation gap between them.”

Matt Lamers can be reached at [email protected]

6 comments on “‘Massive, unsustainable’ value gap between Canadian, US cannabis firms, analyst notes
  1. Maxcatski on

    “The US market offers multiple, major advantages over the Canadian Market.” Except it’s NOT LEGAL in the USA. And the State regulations are a patchwork and a mess. Look at California, for example.

    Meanwhile, Canada has one national regime which is moving forward in a logical and progressive manner. Cannabis companies based in Canada are legal at all levels and have a huge head start on any reforms possible in the United States.

    I will admit that cannabis and cannabis shares both are overpriced in Canada. However, this will correct as the market matures. In the meantime, the US struggles with the much more basic issue of cannabis legalization. Better hurry up, Mexico is coming next!

    Reply
    • Robert Hunt on

      Not sure I agree Maxcatski,

      You see we do have 34 U.S. legal cannabis markets down here in the good ‘ol USA that are currently Federally protected by the Rohrabacher – Blumenauer Amendment, meaning there may be no Federal law enforcement action against those operating in direct compliance with the state laws in which they operate.

      We also have more than 11 years, spanning three different presidencies, and multiple AGs, where regulated cannabis sales have existed without any real intervention from law enforcement against compliant businesses. The current AG, during Senate confirmation hearings, made it clear that the position of the DOJ was that existing businesses had an expectancy interest to continue operating without fear of Federal intervention and that he supported this convention.

      So your “look at California” comment now becomes more relevant. Both Canada and California operate under a single regulatory environment, one under the blessing of the Trudeau Government, the other under the Newsom Government. Canada has 37M people, California has 40M people. Canada is at a serious disadvantage with regard to product selection, population density, logistics, and government intervention in distribution.

      All signs would suggest that as a stand alone market, California is far more attractive than Canada. This is true even today.

      That is why this article is correct to assume that the disparity between valuations of Canadian based businesses and U.S. based businesses does not make any sense. When you think that MSOs that operate in many states that share the same state and Federal protections that Canada does, you realize that Canadian companies are grossly overvalued by comparison to their American peers.

      Add to this, it is very unlikely that the Canadian companies will ever be able to enter the U.S. market in a way that rivals the footprint U.S. companies are already creating. In the oligopoly style states, their only chance is to overpay for existing assets as there are no more licenses available. In the free market states they can build (vs. buy) but they will be years behind the existing operators.

      So I ask you, who is better positioned for the long term? U.S. companies or Canadian? The answer is simple, U.S. companies are a much safer long term investment and they are trading at a significant discount to their rivals on the other side of the cold Northern border.

      Reply
  2. Robert Hunt on

    Not sure I agree Maxcatski,

    You see we do have 34 U.S. legal cannabis markets down here in the good ‘ol USA that are currently Federally protected by the Rohrabacher – Blumenauer Amendment, meaning there may be no Federal law enforcement action against those operating in direct compliance with the state laws in which they operate.

    We also have more than 11 years, spanning three different presidencies, and multiple AGs, where regulated cannabis sales have existed without any real intervention from law enforcement against compliant businesses. The current AG, during Senate confirmation hearings, made it clear that the position of the DOJ was that existing businesses had an expectancy interest to continue operating without fear of Federal intervention and that he supported this convention.

    So your “look at California” comment now becomes more relevant. Both Canada and California operate under a single regulatory environment, one under the blessing of the Trudeau Government, the other under the Newsom Government. Canada has 37M people, California has 40M people. Canada is at a serious disadvantage with regard to product selection, population density, logistics, and government intervention in distribution.

    All signs would suggest that as a stand alone market, California is far more attractive than Canada. This is true even today.

    That is why this article is correct to assume that the disparity between valuations of Canadian based businesses and U.S. based businesses does not make any sense. When you think that MSOs that operate in many states that share the same state and Federal protections that Canada does, you realize that Canadian companies are grossly overvalued by comparison to their American peers.

    Add to this, it is very unlikely that the Canadian companies will ever be able to enter the U.S. market in a way that rivals the footprint U.S. companies are already creating. In the oligopoly style states, their only chance is to overpay for existing assets as there are no more licenses available. In the free market states they can build (vs. buy) but they will be years behind the existing operators.

    So I ask you, who is better positioned for the long term? U.S. companies or Canadian? The answer is simple, U.S. companies are a much safer long term investment and they are trading at a significant discount to their rivals on the other side of the cold Northern border.

    Reply
  3. notapothead on

    I’ll just interject that it is oddly tricky to be sure which companies do business in which company. There are marijuana company tickers trading in the USA which are primarily or even 100% Canadian in their business investments and activities; and there are companies trading only in Canada which are doing up through 100% of their business in the USA. A very strange state of legal affairs which needs to be corrected but cannot be until Congress legalizes marijuana.
    Heck, there is literally a small Marijuana grower & seller down the road from me here in the US which I can only invest in through Canada.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *