One of the more under-the-radar names in U.S. cannabis is Ayr Wellness (AYRW.F 0.89%). At just a $1.6 billion market cap on a fully diluted basis, it's a bit smaller than some of the other U.S. multistate operators. It also happens to be one of the cheapest stocks in the space, on a forward enterprise value-to-EBITDA basis. That's in addition to an entire sector that looks rather undervalued these days, given the sell-off in the space over the past few months.
That may be because Ayr is in the midst of a large transformation. Last year, the company had a presence in only two states: Nevada and Massachusetts. Yet after a slew of transformative acquisitions, it should end 2021 with a presence in eight states, including a recently announced entry into Illinois.
In a surprising move, management decided to take the company's large discount into its own hands shortly after its solid Q2 earnings report.
Announcing a 5% buyback
On Wednesday, Aug. 25, Ayr announced a share repurchase authorization, for up to 5% of the company's outstanding shares -- the maximum authorization allowed for companies listed on the Canadian Securities Exchange.
CEO Jonathan Sandelman said in the release:
We have said time and again that our stock is significantly undervalued, and we are drawing a line under that statement with today's share repurchase announcement. We expect this program to be used opportunistically and to commence immediately. We could not be more pleased with the current state of our operations and continue to invest in our company's explosive growth, as evidenced by our raise in revenue guidance just last week. We continue to invest in and build our business, both organically and through M&A, and this repurchase program allows us to also invest in the exceptional value that our own shares represent.
That is certainly a very big vote of confidence in Ayr's stock; however, should management be more careful with its cash? Sandelman highlighted the $124 million in cash on the company's balance sheet. However, Ayr also has $230 million in debt. To execute two upcoming acquisitions in New Jersey and Illinois, Ayr is also on the hook for another $64 million in cash, and it will also be taking out a seller note for $46 million once it's consummated. So cash levels will go down by about $18 million once those acquisitions are consummated.
Also, given that Ayr used $22.4 million of operating cash, along with $31.6 million in capital expenditures and anther $17.8 million for acquisitions just in the first half of the year, it doesn't really seem as if buying back shares would be prudent if it continues to invest that heavily.
But the future should be much more profitable than the past
Once again, however, Ayr is a rapidly changing company, so as its new acquisitions, grow facilities, and growing retail stores open up, profits should follow. After all, revenue did skyrocket 222% year over year last quarter, and adjusted EBITDA grew slightly faster than that at 225%.
Ayr has made good on its promise to rapidly improve its Florida grow operations acquired in February, with a 50% increase in grams per square foot since that time. That's allowing the company to rapidly expand in the state, with eight additional Florida dispensaries opened since the closing. Florida, because of its vertically integrated rules and regulations, has proved to be a high-profit state for those companies fortunate enough to have an early license there.
In addition, Ayr has just recently brought on large production facilities in both Nevada and Arizona, and it will now start generating revenue from these past investments. Ayr also just expanded its wholesale sales in Pennsylvania and began production of edibles and vapes at its Ohio facilities.
As all these recent and upcoming grow, processing, and retail facilities come online, management projects over 100% year-over-year revenue growth quarterly for the foreseeable future. Management also raised its 2022 guidance to $800 million in revenue and $300 million in adjusted EBITDA. That adjusted EBITDA figure would mark a near-tripling over the company's current run rate, and an expansion from 30% to about 37.5% EBITDA margins. That should be enough to generate actual profits, even with the burdens of high interest costs and high taxes.
Ayr has made good on several of its projections in the past, such as improving the Florida operations and logging some impressive revenue growth. So if you believe management can make good on its 2022 projections, the share buyback could be a very savvy move to capture more long-term value of this unloved cannabis stock.