It's difficult for U.S.-based cannabis companies to raise money from banks due to the federal ban on marijuana. And many of these multi-state operators are burning through cash, meaning they'll need to dip into the equity markets to help keep their operations afloat. For investors, that can be frustrating because frequent share issues not only dilute their ownership in the company, but also drive the share price down.
None of this is the case for marijuana producer Ayr Wellness (AYRW.F -13.65%), which recently announced that it was going to buy back shares rather than issue them. But is this a good move for a company that will likely need cash to keep funding its growth?
Ayr Wellness to buy back 5% of shares
On Aug. 25, Ayr Wellness announced that its board of directors had approved the repurchase of up to 5% of subordinate shares (which only get one vote versus the company's "multiple voting shares," which make up less than a tenth of the outstanding share count but allow for 25 votes apiece). The reason for the repurchase, according to CEO Jonathan Sandelman, is that the current share price is simply too cheap: "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."
The authorization is good for the next 12 months, but the purchases can begin right away. Share buybacks are popular in the tech sector, where fast-growing companies that are doing well reward their shareholders through repurchases. It can be a better option than paying a dividend, which can create an ongoing expectation for investors that becomes burdensome for the company. But the one concern many cannabis investors will likely have is whether these share repurchases will divert valuable cash flow away from Ayr Wellness' operations, and possibly lead to dilution in the end.
CEO says the company's growth is well-funded
In anticipation of the question, Sandelman stated that "the share repurchase program will in no way interfere with our ambitious growth plans to enter new markets and/or complete our current capital projects." He also says that the company is still on track for its ambitious 2022 guidance, which forecasts revenue of $800 million and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $300 million.
And a quick look at the company's statement of cash flow does suggest that the business isn't in a bad spot. Over the trailing 12 months, Ayr Wellness has used up just $1 million in its day-to-day operations, and in two of the past four periods it generated positive cash flow. With more than $120 million in cash on its books, management feels it is in a good position to buy back shares while still pursuing growth opportunities. If the company were to buy back 5% of the roughly 49 million shares it has outstanding, that would cost it less than $60 million based on the current share price.
Does this make Ayr Wellness a buy?
Compared to other MSOs, Ayr Wellness is a relatively cheap pot stock to own:
This could be a promising investment, especially if Ayr Wellness hits its 2022 targets. And management's confidence in the company is a great sign that the business is in good shape. The potential repurchase doesn't represent a huge amount of cash for investors to worry over. And I wouldn't fault the company for trying to separate itself out from serial diluters, including Canadian-based marijuana company Hexo, which announced an offering of $140 million a few weeks ago that sent its shares into a tailspin.
Unfortunately for Ayr Wellness investors, news of its share buybacks didn't have the reverse effect for its stock; it has even gone on to fall since the announcement -- perhaps due to cash-flow concerns.
For long-term investors, now may be an opportune time to buy shares of Ayr Wellness before it ramps up operations in hot markets like Massachusetts and New Jersey, which will likely be pivotal to its growth.