Next Tuesday could be a big day for marijuana. It could be an even better day for an Arizona dispensary operator known Harvest Health & Recreation (OTCQX:HRVSF).
Voters in five states will go to the polls on Nov. 3 to tick “yes” or “no” on legalizing marijuana, either for medicinal or recreational purposes, or both. The states in play are New Jersey, Arizona, Mississippi, South Dakota, and Montana. Local polling indicates that a “yes” vote will likely carry the day in the first four states. Montana appears to be a bit more challenging to call and will likely come down to undecided voters.
Among those five, however, two in particular stand out: Jersey and Arizona.
A “yes” vote to fully legalize weed for adult-use in Jersey would solidify the Northeast as a bastion of marijuana freedom, on par with the West Coast. A “yes” vote to legalize adult-use in Arizona, meanwhile, would add yet another state to the West Coast bloc of legal weed and would open the country’s fifth-most populous city – Phoenix – to dramatically increased recreational sales.
Generally speaking, a positive outcome in those votes would likely benefit legal weed stocks overall. At that point, more than 75% of US states will have legalized weed in some fashion, and that ultimately will put pressure on the federal government to adopt a softer stance on marijuana … which, in turn, will have investors increasingly high on the future for marijuana stocks.
But the Arizona vote, in particular, could be the catalyst that causes a pop in the share price of Harvest Health.
With a market cap of just over $550 million, Arizona-based Harvest is a tiny company, without question. Which means this is a risky little stock. But snapping some shares now, in anticipation of a positive turn of events in Arizona’s marijuana vote, is a calculated risk based on the strong likelihood that Arizonans approves Proposition 207 on Tuesday. At the moment, 56% of likely Arizona voters tell pollsters that they’ll pull the “yes” lever; that’s up from 51% a month earlier.
If “yes” wins, then there’s a decent likelihood that Harvest Health shares pop on the news, which makes this stock a potentially profitable, short-term trade.
While Harvest operates dispensaries in seven states, nearly half of its 38 stores are in Arizona. At the moment, Arizona is a medicinal-use state only, and still it manages to generate more than $900 million in annual sales. If the state goes full recreational, those sales would quickly jump to an estimated $1.5 billion, or so says the Marijuana Industry Trade Association of Arizona. Within a couple years, sales could quite easily approach $3 billion.
At the center of that: Harvest Health, the largest operator of dispensaries in the state.
Smoothing a Bumpy Path
To be sure, Harvest has faced a rough road on Wall Street over the last 18 months or so. From a peak price near $9.60 in March 2019, the shares have plunged to about $1.50 – a nearly 85% decline.
A big part of the reason was Harvest Health’s appetite for acquisition was bigger than the tiny company could digest. Planned deals were axed. Dispensaries in California, the Holy Grail in weed world, were sold. In all, Harvest Health was doing all it could to right-size the company after its overzealous growth hamstrung the company with quarterly losses that at one point amounted to more than $88 million.
But if the most recent quarter (Q2, which ended June 30) is any indication, the company’s path from perdition is looking smoother.
Revenue topped $55.6 million, continuing the company’s lock-step march higher from just over $19 million in Q1 of 2019, and more than double the $26.6 million recorded a year ago. The company still lost about $18.3 million, or five cents per share, but that was sharply reduced from the year-earlier loss of $25.5 million, or nine cents per share.
Better yet, Harvest has meaningfully reduced operational costs by more than a third over the last four quarters, and its adjusted EBITDA turned positive for the first time. That’s a promising turn of events for a small company in an industry where losses and out-sized spending are rife.
And it’s all the more interesting in light of Tuesday’s vote.
Harvest currently operates 16 medical-use dispensaries in Arizona, and has the legal authority to operate 22. Potentially more important is the fact that the so-called Smart and Safe Arizona Act (as Prop 207 is also known) would give owners of existing medical-marijuana dispensaries first shot at applying for retail licenses, based on the number of medical-marijuana licenses they have.
For Harvest, that means as many as 22 retail licenses – roughly 15% of all the existing licenses in the state, at the moment. That’s a potentially huge windfall for the company, because it means that competition in the first few years will be limited to existing players, giving Harvest a leg up in establishing its brand and its presence before any interlopers invade.
Marijuana Business Daily, an industry trade publication, projects Arizona retail sales could amount to between $375 million and $400 million in the first year. How much of that would end up on Harvest Health’s top line is impossible to say. But somewhere between 10% and 15% doesn’t seem unreasonable, given the company’s footprint in the state. That would imply Arizona’s new retail trade could add, roughly, between $35 million and $55 million to Harvest’s annual revenue stream.
With Harvest’s current run-rate of about $220 million in annual sales, Arizona’s retail trade could prove to be a substantial jolt for the company. Pair that with management’s ongoing efforts to streamline SG&A, and its ability to leverage its Arizona operations in a new recreational-weed environment, and this money-losing marijuana retailer could see its path to profitability suddenly speed up.
All of which should quickly factor into the shares in the aftermath of a “yes” vote in Arizona (assuming that happens). Which is why Harvest Health could be a calculated risk that pays off well in the wake of Tuesday’s vote.
How Soon Before Prop 207 Benefits Harvest?
The question, of course, is: When will retail dispensaries open their doors in Arizona, assuming voters approve the ballot measure?
That will depend on how long it takes state regulators to fashion all the necessary rules for retail marijuana. Still, that shouldn’t take very long, a few months at most. I’d venture to say Arizonans will be buying retail weed sometime in the first quarter of 2021.
Thus, next year could be quite promising for Harvest Health.
The risk with this trade, of course, is that Arizonans surprise pollsters and shoot down the measure. After all, Proposition 205 failed in 2016 and it was fundamentally the same as the Smart and Safe Arizona Act.
Of course, with Harvest shares already down 85%, the downside from here isn’t egregious. Disappointed investors might know the price down a few cents, but there’s probably not a big downdraft that happens, particularly given that the company’s ongoing and growing operations in Arizona (and elsewhere) would be materially unaffected.
But, again, I’ll say that this is a calculated risk on notching some short-term gains based on the increasing likelihood that voters approve Arizona’s recreational weed initiative. With uncertainty out of the way and a large boost to sales inevitable, Harvest Health shares could see a nice pop following the election.
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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