Viridian Chart Of The Week: Are We Close To The Bottom For 2023 EBITDA Estimates?

The graph shows 2023 EBITDA consensus estimate revisions since 9/1/22 for 18 cannabis companies. The chart decomposes 2023 EBITDA revisions into the portion attributable to lower revenues (blue bars) and the portion attributable to lower EBITDA margins (red bar).

Estimate cuts range from a reduction of over 50% for Lowell Farms LOWLF to a drop of only 6.9% for Cresco CSE.

Over the last few months, we have been saying that we did not believe analysts had sufficiently factored in margin pressures from commoditization and inflation. The chart bears out our theory. 4Front FFNTF is the only company with positive EBITDA margin revisions, and half of the companies had more significant EBITDA declines from margin reductions than revenue reductions. Year to date, analysts have cut 2023 revenue and EBITDA estimates for the group by 29% and 44%, respectively. 

2022 has been a problematic year operationally for cannabis companies. Wholesale prices have fallen sharply in nearly every mature market, preventing inflationary cost increases from being passed on. New York, the most highly anticipated recreational market opening, has been delayed repeatedly. California, which seemed briefly to be turning around, has instead continued to sink. Moreover, a true test of the recession/inflation resistance of the industry is at hand. Already, basket sizes have been coming down in multiple markets as pressured consumers trade down to lower priced products.

Still, the picture is not all bleak. New Jersey has been a resounding success, and two big markets, Maryland and Missouri, legalized in the midterm election. Illinois sales are up 16% yoy ahead of new licenses coming online, and New York may yet get its act together. Additionally, many industry watchers believe a divided legislature is ideal for passing SAFE+ legislation. 

Despite these positives and our bullishness on equity prices, we are cautious about industry profitability. Companies that are well positioned for the opening of new markets enjoy outsized profitability until cultivation capacity catches up to retail demand and wholesale prices begin to fall. With no 280e relief or federal legalization on the horizon, success will increasingly mean tight expense control and careful capital budgeting. We will be updating our liquidity analysis as earnings season finishes this week.  

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.