The past few months have been good for U.S. cannabis stocks. Not only have most U.S. operators largely reported stellar fourth quarter and full-year 2020 earnings results, but with Democrats taking control of the presidency and both houses of Congress, leading U.S. MSOs could also see some regulatory rollbacks sometime in this administration.
Still, U.S. cannabis stocks have pulled back recently, in line with many high-growth technology stocks. That's not really surprising, as both types of companies are currently experiencing very high revenue growth but little in the way of current net profits, and are thus getting hit by fears of higher interest rates and inflation.
After the sell-off, these promising growth stocks have become more attractive. And one high-quality yet less well-known operator looks much cheaper than the others.
Ayr Wellness may be the best combo of growth and value in U.S. cannabis today. Image source: Getty Images.
Not getting enough Ayr time with investors
Investors may not know Ayr Wellness (AYRW.F -7.23%) as well as more established U.S. cannabis companies, because Ayr itself is currently in the midst of a huge transformation. The company started 2020 with a presence in just two states: Nevada and Massachusetts. But by year-end 2021, it will have a presence in seven states, after seven acquisitions during 2020. The new states will include Pennsylvania, Florida, New Jersey, Arizona, and Ohio.
As we'll see below, Ayr may trade somewhat in line with other pot stocks based on its current results; however, looking forward, it's going to be a massively bigger company. The Florida and Arizona acquisitions just recently closed, and New Jersey should close in the third quarter.
Moreover, its new acquisitions are in some of the most attractive states for cannabis. All are limited-license states currently seeing strong growth. And of course, New Jersey and Arizona just voted to cross over from medical to adult use, and should therefore see ever bigger growth going forward.
Could the Florida acquisition be a massive home run?
There's also an interesting opportunity for Ayr in Florida, where it just closed the acquisition of Liberty Health Sciences Inc., giving it 31 existing dispensaries, along with another four under construction and seven more in development. This acquisition could be hugely valuable, given that the company is taking on a lot of dispensaries in a large state with relatively high barriers to entry and strong growth prospects.
The Florida medical cannabis market could be a home run for Ayr. Image source: Getty Images.
Liberty's dispensaries were serial underperformers compared with other Florida cannabis companies, with each store generating less than 50% of the revenue of a typical Florida dispensary. That's because for some reason, Liberty had problems with its cultivation. So, the problem wasn't with demand, but rather supply -- and that's fixable.
There's good reason to think Ayr could vastly improve operations. If the Florida grow facilities get to the yield of its Nevada and Massachusetts operations, it would enable a three-fold improvement in yields, according to management. Ayr has already increased the productivity of both its Nevada and Massachusetts facilities over the past two years, with a 33% increase in sales per square foot just in 2020 alone. Management also just put its turnaround specialist on the ground in Florida late last year, and the new operator appears to already be showing results:
Liberty in November hired a gentleman named Darrin Potter, who has been working on the remediation of the cultivation since, again, November. And if you look at the failure and testing that occurred in September, it was roughly 25%. If you look at the most recent test results, it's about 4.5%. So Darrin has done a great job already putting the SOPs in place to turn the cultivation around.
If Ayr can turn around Liberty's Florida operations, it may have gotten a huge bargain. Ayr only paid $290 million in stock for Liberty's Florida assets. For reference, Florida leader Trulieve (TCNNF -6.26%) has a little more than twice the number of Florida dispensaries, at 75 as of the end of the fourth quarter, making up some 90% of Trulieve's assets. And Trulieve has a market cap of $5.7 billion! So, assuming Ayr can bring these assets up to speed, it could be a huge windfall.
Well-run and cheaper than peers
Ayr's management team knows a thing or two about making mergers work. Senior management is made up of former investment bankers and private equity executives from the likes of Bank of America (BAC -1.07%), Goldman Sachs (GS -0.71%), and JPMorgan & Chase (JPM 0.15%). And despite being smaller than most of the leading MSOs today, Ayr still garnered the second-highest EBITDA and operating cash flow margin of any U.S. operator in the third quarter 2020, behind only Trulieve.
Even better, the stock appears to be trading at a much lower future multiple than peers. According to 2022 EBITDA estimates, Ayr is only trading around 7.6 times EV/EBITDA, compared with the 15.6 industry average. Granted, 2022 is still a ways away and these are just estimates; however, it appears Ayr is currently a "show me" story for some investors, who may not fully grasp Ayr's big expansion plans. That makes it a relative bargain in the exciting U.S. cannabis industry.
