The upheaval in the general market could bleed over into the cannabis industry. Canceled cannabis conferences affect numerous businesses in the food chain whether it's the company producing the event or the vendors who have lost their access to reaching new customers at the events. Strapped cannabis companies are immediately slashing marketing and public relations budgets as well.
It is truly seen as a Darwinian era in this nascent industry as it becomes survival of the fittest. Many have argued that cannabis could be recession proof. Like alcohol and cigarettes, some products are must haves for strapped consumers. That means that in this climate of tight capital, the companies that are best positioned to weather the storm will emerge as the victors.
There are the top three best-capitalized cannabis companies according to Vivien Azer at Cowen & Co. It is based on company reports and calculated as total cash, short-term investments and restricted cash divided by monthly average last 12 months cash flow form operations less capital expenditures.
Cronos Group's Got Cash
Azer said that Cronos Group (CRON) is the best-capitalized cannabis company at this time. It has 140 months of cash remaining based on last 12 months free cash flow. Luckily for Cronos, it snagged its cash before investors decided to close their wallets. It has $2 billion in cash, thanks in part to a 2018 investment from Altria Group (MO) . It is one of the smaller cannabis companies with a market cap of $1.8 billion. Azer wrote, "Cronos has purposefully passed on joining Canada's fight for capacity, leveraging its asset-light model to be able to purchase third-party supply as an ingredient and focus on branding."
Altria's involvement will help Cronos in other ways like the rollout of Cronos' CBD line. Cronos is conducting tests on its new CD product called Peace + CBD tinctures at the convenience store level. Cronos will have the option of using Altria's retail network for expansion. Cronos, though, will be delayed in reporting its earnings so while the cash levels are bold. The company said the delay is due to a review by the Audit Committee of several bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of revenue from those transactions. It would be best to wait until after the earnings report.
Aphria Adds Up, too
Aphria (APHA) is second place with 22 months of cash remaining, which looks pretty impressive when you consider some companies have less than six months of cash. This gives Aphria a decent runway. In January, the company reported total net revenue in the second quarter of $120.6 million, which jumped 457% over last year's second quarter. Aphria delivered a net loss of $7.9 million, but a positive $1.9 million in earnings before interest, taxes, depreciation and amortization in the quarter. Aphria reported that the average retail selling price of medical cannabis (exclusive of wholesale), before excise tax, increased to $8.16 per gram in the quarter, compared to $7.56 in the prior quarter, primarily related to a higher percentage of total medical sales coming from Broken Coast in the prior quarter.
The company noted that customer demand exceeded its supply capabilities in the second quarter as a result of the timing of Aphria Diamond's license receipt and as a short-term measure the company purchased wholesale products from other Licensed Producers to supplement its near-term supply capabilities. Aphria is forecasting that for fiscal 2020, it expects to deliver net revenue of $575 million to $625 million and roughly $35 million to $42 million in earnings before interest, taxes, depreciation and amortization. Carl Merton, Aphria's Chief Financial Officer said, "We look forward to generating an acceleration in our revenue and profit growth in the second half of the fiscal year and continue to believe the Canadian and international cannabis industry outlook remains robust."
Canopy Growth's Covered
Canopy Growth CGC comes in third with 18 months of cash remaining based on free cash flow and a healthy $2.3 billion cash stockpile. While the company has been on an acquisition binge since getting the capital, it has developed a diversified revenue stream. The executive suite has been switched over to heavy dose of Constellation Brands (STZ) proven leaders and the company recently announced a massive right sizing of the company. Not to negate the loss of 500 jobs and the closure of two indoor grow facilities, but it was probably best to rip off the band aid and recognize that big changes needed to happen.
Azer wrote, "We think holding leading share while reaching 40% gross margins in 4Q2020 will be enough to support the next leg up for the stock." It is her only Outperform-rated stock, which she has said it mostly due to the executive team. She believes the company will continue to gain market share and capitalize on the slowly growing Canadian adult-use market.
With capital so tight, the companies that are securing cash right now are doing it at loan-shark prices. It is survival mode in the cannabis industry and companies are quickly cutting expenses and focusing on profitability. The ones with the biggest cash cushion could be the ones the with the best potential for longevity.