GrowGeneration (GRWG 7.11%) and Turning Point Brands (TPB -0.58%) are ancillary cannabis stocks. They don't sell cannabis, but benefit from cannabis sales and use.
The advantages of ancillary cannabis stocks compared to pure-play cannabis stocks are that ancillary companies are usually more established, and their shares are less volatile, as their businesses are less susceptible to the problems that face some pure-play stocks, such as difficulty getting funding from traditional sources.
In return for that reduced risk, they may also have less long-term upside, though many ancillary stocks that deal in some way with cannabis should still benefit as more states open up to cannabis sales. Looking at GrowGeneration, the largest hydroponics supply company in the U.S., and Turning Point Brands, known for its alternative smoking products, which is the better buy right now?
Is it time for a GrowGeneration comeback yet?
GrowGeneration's shares are down 58% so far this year, but over the past month, they're up nearly 90%. The company's third-quarter earnings brought renewed optimism about its future, which may be surprising if you look at the numbers.
GrowGeneration reported that revenue was $70.9 million in the quarter, down 39% year over year, due to declining demand because of an oversupply of cannabis. The company also reported a net loss of $7.2 million, or $0.12 in earnings per share (EPS), compared to a net profit of $4.0 million and EPS of $0.07 in the same period last year. The company's revenues have declined for five consecutive quarters.
Despite those negative numbers, the market reacted positively because GrowGeneration's revenue was expected to fall more than it did, and the company upgraded yearly guidance. It said that it now expects 2022 revenue to fall between $270 million to $280 million, up from earlier estimates between $250 million to $275 million. It also increased 2022 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to be a loss of between $10 million to $13 million, compared to an earlier range of between $12 million to $15 million.
With revenues down, a lot of cannabis retailers are tightening their belts, which means they aren't building out operations, so they aren't buying as many supplies from GrowGeneration. Until that macroeconomic force changes, GrowGeneration isn't likely to see a big surge in revenue.
Turning Point Brands hit hard by inflation
Turning Point Brands' shares are down more than 43% this year but up 4% over the past month. The company makes consumer products, such as smoking accessories and some CBD products, but its greatest exposure to cannabis is it makes Zig-Zag rolling papers.
The company has had its own struggles this year. In the third quarter, revenue was down 1.9%, year over year, to $107.8 million. That's despite sales for Zig-Zag being listed as $52.1 million, up 23.3% over the same period last year.Net income in the quarter was $11.5 million, down 14.3% year over year, and EPS fell to $0.60 compared to $0.65 in the third quarter of 2021.
Inflation was partly to blame for the decline. The cost of the company's supplies went up at the same time customers were looking to cut expenses, and some of them cut back on smoking supplies.
One positive in the report is the company's numbers were an improvement over its disappointing second quarter, with revenue being 4% higher and net income up 113%.
Unlike GrowGeneration, Turning Point lowered its full-year guidance, saying it expected Zig-Zag products to be between $186 million to $191 million, down from an earlier range of between $193 million to $200 million. It also said it expected adjusted EBITDA to be between $96 million to $99 million, compared to earlier estimates of between $97 to $103 million.
Turning Point also has a quarterly dividend of $0.06, which it last raised by 20% in 2021, giving it a yield of around 1.12%. That's lower than the S&P 500 average dividend yield of 1.82%, but with a low cash dividend payout ratio of 16.15%, it's easily sustainable and leaves room for future growth.
Data by YCharts.
Making a choice
Of the two stocks, for the time being, I see more promise in Turning Point Brands. The company has less exposure to volatile cannabis trends, and seems to be closer to turning things around, based on its last quarter's results.
I also see Turning Points Brand's stock as being better priced, based on the company's lower price-to-earnings (it trades at under 11 times earnings) and price-to-sales ratios.
