Cannabis Earnings Season. Who Will Fly High?

Tomorrow, New Age Beverages, Tilray and GW Pharmaceuticals announce earnings. What should investors expect? (Innovative Industrial Properties announced 1Q 2020 earnings on Wednesday, May 6, 2020.)
 
The last earnings reports of Tilray, New Age Beverages and GW Pharmaceuticals were astonishing, with GW Pharma reporting an eye-popping increase in sales to $109.1 million for the 4th quarter, compared to just $6.7 million in the same quarter of 2019. Tilray’s year-over-year revenue increase was 202%, with 323% revenue growth at New Age Beverages.
 
Everyone is waiting for the FDA to allow CBD use in the U.S., and some guidance is forthcoming “soon.” However, currently CBD is illegal on a nationwide basis, despite what states choose to do. That means that most CBD products in the U.S. are not coming from the publicly traded cannabis companies, largely because they want to remain in compliance with their listing standards. The flood gates will open when (if?) CBD is legalized. (Currently only GW Pharmaceuticals’ epilepsy RX is legal.)

Forward Outlook
While many industries are under lockdown, the cannabis industry, including the supply chain, has been deemed an essential business. Still there are stresses within the system. It has always been more difficult for cannabis companies to raise money and open a bank account – and even more so today, when so many corporations need a handout. Having an experienced executive team, with an ability to raise money in a young (recently legal) industry, while tightening the budgetary belt and focusing R&D and expansion on the most scalable products, is key. Aphria is in the hands of Irwin Simon, the founder and former CEO of Hain Celestial, with Walter Robb (the former co-CEO of Whole Foods) on the board. Tilray has an exemplary international advisory board and executive team. New Age Beverages has a license to use the Bob Marley brand for many beverage products, including a line of CBD beverages.

On the revenue side, the question is how much will COVID-19 impact earnings?
 
Aphria: Aphria suspended their forward guidance. For the quarter ended February 29, 2020, Aphria’s sales growth almost doubled from $73.6 million to $144.4 million, year over year. Net income was $5.7 million. Based upon the previously issued guidance, the company was expecting an impressive increase in revenue for 2020 in the range of $575 to $625 million, from $237 million in 2019.  For the nine months of the 2020 fiscal year, revenue was already up to $391 million. If the company is able to hit the high end, despite suspending guidance, then the revenue growth in the next quarter should be 89% year over year. Expect the fiscal 4Q and full year 2020 earnings report around August 1, 2020.
 
GW Pharmaceuticals: Most of GW Pharmaceuticals current revenue comes from one epilepsy drug. The real questions for tomorrow’s earnings call are: “How big is the market place for Epidiolex? Now that the DEA has descheduled the drug as a controlled substance, will more patients suffering from epilepsy receive the CBD-based drug?”
 
GW Pharmaceuticals had $536.9 million in cash and cash equivalents, at the end of 2019, with a net loss of $24.9 million. If sales in the 1st quarter of 2020 are similar to the 4th quarter of 2019, then the year-over-year increase will be impressive, at 278%.
 
The company’s sights are now set on bringing nabiximols, a treatment for multiple sclerosis, to the U.S. Their distribution partner in the U.K. is Bayer. Novartis is another partner. GW Pharmaceuticals has been successful in navigating the regulatory road map of the DEA and the FDA with Epidiolex. Will it have similar success with Savitex (the brand name of their nabiximols)?
 
Innovative Industrial Properties: While cannabis has been allowed to operate as an essential business, as of May 2, 2020, IIP was forced to work with 3 of their 21 tenants to provide temporary rent deferrals. The company advises that this amounts to just 3% of their revenue. As long as the stress is limited, then the revenue growth can still be impressive. Last year, in the 2nd quarter, Innovative earned $8.6 million in revenue.
 
New Age Beverages:
New Age is projecting revenue growth of 6-10%. This is a screeching halt from last quarter’s revenue growth of 323%. The company is exiting some of its brands, including Coco Libre. Last year, they announced that the Marley brand of CBD beverages wasn’t going to be launched in the U.S. due to regulatory walls. Though they had shelf space in Walmart and 7-Eleven, they discovered that their “new age” products, including the Marley brand, were not top sellers there. (I must have been in the minority for the organic Marley coffee.)
 
Will the Noni products – an immune builder that decreases inflammation in the body – gain a greater audience? Will Nestea become popular again? Will the U.S. magically legalize CBD products and beverages? While tomorrow’s earnings report will not be as stellar, investors will be focused on the projected growth of their Noni +CBD products, the direct sales campaign and any other exciting news that New Age can conjure up.
 
New Age’s modest earnings report may already be priced into their stock. The company’s share price is trading near the 52-week low. The market cap, at $147 million, is lower than their annual sales, of $254 million. Their cash and cash equivalents were at $60.8 million at the end of 2019.
 
Tilray: Revenue increased 278% year over year in 2019, and 202% in the 4th quarter for Tilray. At the current pace, Tilray’s revenue will double in the 1st quarter of 2020 – providing there wasn’t a severe impact from COVID-19.
 
Tilray has a partnership with Anheuser-Busch and LaBatt for CBD beverages. Their leadership team is strong, with experience from Revlon and Molson Coors. They recently partnered with Columbia University on an Rx treatment for women suffering from breast cancer.
 
Tilray raised $90.4 million on March 13, 2020, through an equity offering priced at $4.76. The share price has since recovered quite well. The current price is $7.78. They are projecting positive EBITDA by the 4th quarter of 2020, and cash flow positive in 2021.
 
Buy? Sell? Hold?
So, should you buy, sell, hold or mix it up between a few of these strategies? Start by asking the following 3 questions.
 
Questions:
What can the company do?
What can the industry do?
What is the general marketplace doing?
 
Many of these companies are absolutely on fire, with executive teams who can innovate, deliver the products and raise capital until the companies are cash flow positive.
 
The industry is growing leaps and bounds, too. However, there is still a lot of illegal trade going on, as well.
 
It’s not all coming up roses for publicly traded cannabis companies, despite the popularity of their products and the robust increases of their sales. When the stock market dropped like a knife between February 19 and mid-March of this year, Tilray lost 85% of its value. Aphria sank by 63%. New Age Beverage imploded by 61%, and GW Pharma lost 42%. Most of the companies are still trading near their 52-week lows. However, if investors get wind of the recession and sell their stocks, cannabis stocks could take another hit. 
 
Bottom Line
These cannabis companies are doing great in an explosive industry. However, their share price is on the Wall Street rollercoaster. In that environment, a buy low, sell high plan works well, as does using a limit-order capture gains strategy. The right answer might not be all or nothing. And it never hurts to have a Stock Shopping List in case investors are disappointed with the earnings reports, or the general marketplace just drags everything south.
 

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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

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