Welcome to our Cannabis Earnings series where we break down the latest earnings to help you focus on the most important topics.
Introduction
Curaleaf (OTCPK:CURLF) announced their 2018 fourth-quarter results on March 20, 2018, after the market closed. The company not only reported strong revenue growth but also disclosed that it has been chosen by CVS Health (CVS) as its national CBD supplier. Given the significance of this news, the stock shot up 31% and reached its all-time highs. We think the stock is a case of first-class execution being priced to perfection in the markets.
Historic CBD Deal with CVS
In a move that sent shock waves throughout the cannabis industry, Curaleaf announced that it has landed a deal with CVS Health to distribute its CBD products at more than 800 CVS stores initially. The detailed deal terms were not disclosed, but CVS’s CEO did confirm that it has already begun selling CBD products in select stores. The products being sold at CVS stores are mostly tinctures, creams, lotions, vape pens etc. Based on the current FDA guidance, companies are not allowed to market CBD in food, supplements, or drugs without approval from the agency. We think CVS is clearly confident that the products it carries are in strict compliance with the FDA guidance. While Curaleaf is the only company to publicly disclose their deal with CVS, we have seen social media posts where three other brands were displayed on the shelves at select CVS stores including products from Charlotte’s Web (OTCQX:CWBHF). It seems clear to us that Curaleaf is only one of the several vendors selected by CVS in their pilot CBD program.
(Source: Company Website)
This announcement has profound meanings because it is the first such deal within the CBD industry according to our knowledge. We’ve recently written on the two largest public CBD-focused companies, CV Sciences (OTCQB:CVSI) and Charlotte’s Web, and we highlighted a national deal would be the largest catalyst for these two companies. While Curaleaf is not the exclusive vendor, we think it nevertheless represents a major win for the company. We think this deal represents a fantastic way for Curaleaf to build up its CBD business which will only complement its multi-state operations that are currently undergoing a period of rapid growth. While it is hard to quantify the potential financial impact of the CVS deal, we think sales could make up a meaningful portion of its 2019 revenue guidance of $400 million.
Impressive Quarter
Curaleaf reported 2018 Q4 results which came in above expectations mainly due to the impressive sales ramp and store expansions. Gross margin remained in-line at 50% and is a healthy number in our view. The higher revenue was driven by 7 new stores that opened during the quarter in key markets including Florida and Arizona. As of December 31, 2018, the company has 36 dispensaries open and 12 cultivation sites as well as 10 processing sites. The biggest markets for Curaleaf are Florida with 20 stores, Arizona with 5 stores, and 3 stores in New York. The company reported $267 million of cash available at the end of 2018. Moreover, Curaleaf’s founders and key shareholders have agreed to lock up 81% of the total shares until at least October 20, 2019.
(Source: Author based on public filings)
As we described in “Ambitious 2019 Guidance Targets $400 Million Revenue“, we think Curaleaf has set a very high standard for themselves by giving out this ambitious guidance. While we think the company has a clear path to reach its target of 69 stores open by the end of 2019, supported by its rapid expansion in Florida to the limit of 35 stores, Curaleaf also needs to receive significant contributions from its CBD line of business, which just received a huge vote of confidence from the deal with CVS Health.
Looking Ahead
On the back of strong Q4 results and the historic deal with CVS Health, Curaleaf stocks rallied more than 50% last week. However, Curaleaf sold stocks during its RTO round at C$11.45 last October, so the stock is only now reaching its RTO prices again. The stock experienced a big slump after the RTO as the stock was priced to the fullest and a little more during its fundraising, but recent success has brought the stock back to those levels. The stock now trades at 33x EV/Revenue (last quarter annualized) which is in line with peers. While it is difficult to compare valuation now as many of the MSOs have not reported their 2018 Q4 results and given the expected ramp up in revenue in all key markets. For reference, Canopy (CGC) trades at 57x EV/revenue and Aurora (ACB) trades at 62x EV/revenue, both of which benefit from premium valuation observed among large-cap Canadian LPs.
(Source: TSX)
While we think Curaleaf appears to be fully valued, we also think the valuation is reflective of the recent successful execution and the impressive introduction of its national CBD line. Curaleaf has emerged as the single largest U.S. cannabis company as measured by market caps which stood at C$5.5 billion as of last Friday (second largest is Harvest Health (OTCQX:HRVSF) at C$3.8 billion including its recent Verano acquisition). We reiterate our position that the best way to invest in the U.S. cannabis sector is through a portfolio of high-quality names and Curaleaf definitely deserves a place in that portfolio. Key upcoming catalysts for Curaleaf include further expansion in Florida, the ramp in Massachusetts’ nascent market, potential entry into new markets such as California and Ohio, and continued expansion of its CBD business including more distribution deals after the CVS deal and various partnerships in support of a national rollout of its own branded CBD products. We continue to like Curaleaf’s strategic direction and execution so far.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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