Although the market tends to focus on the leading cannabis producers and retailers in the US and Canada, the ancillary side of the business represents a burgeoning opportunity, and this is a vertical that tends to get overlooked.
Earlier this week, The Scotts Miracle-Gro Company (SMG) reported an important development and raised sales and earnings guidance based on higher demand in both its US consumer and Hawthorne segments. The stronger guidance provides favorable insight on the strength of the cannabis industry as Hawthorne is highly focused on selling the necessary cultivation equipment to cannabis businesses.
For the fiscal year that ends on September 30th, Scotts expects company-wide sales growth of 16% to 18%. Last month, Scotts provided company-wide sales guidance of 6% to 8% growth for the year. Hawthorne is expected to play an important role in the growth of the business, and we are bullish on this vertical. After initially announcing that it expects Hawthorne to record 30% to 35% growth, the company raised expectations to growth of 45% to 50% for the year.
Scotts’ better-than-expected guidance on Hawthorne supports our view of how the cannabis industry has been growing and we find this to be of importance. If cannabis companies are purchasing more equipment than before, then we expect to see an increase in the amount of cannabis that is being produced.
Although many analysts have cited concerns that are related to an oversupply of cannabis in Canada, many Licensed Producers (LPs) have already shut down large-scale cultivation facilities and we believe that our readers need to be aware of this. From the US to the European Union (EU), we are seeing increasing demand for legal cannabis and this is a trend that we expect to become more significant on a year-over-year basis.
When compared to the first half of 2019, the cannabis industry has recorded impressive growth so far this year. We expect to see companies that are focused on the production and the sale of cannabis benefit from the increase in the amount of cannabis that is being sold. This increase has taken place while the global economy has been trying to recover from COVID-19 and we find this to be an important data point.
Following Scotts’ decision to raise guidance, we conducted analysis on the companies that have recently reported earnings to better understand the businesses that could be beneficiaries of this trend.w
- Aurora Cannabis Inc. (ACB.TO) (ACB) is a leading Canadian cannabis producer that recently reported stronger-than-expected quarterly financial results and is an opportunity that we are closely following. With leverage to several burgeoning international markets, the company is highly focused on the global cannabis opportunity. Over the next year, we expect to see an increase in the amount of cannabis that is being produced by Aurora Cannabis and is a business that is expected to benefit from current market trends.
- HEXO Corporation (HEXO.TO) (HEXO) is another company that could have benefited from the increasing interest in cannabis. The company has a strategic relationship with Molson Coors and this an attractive aspect of the story. Although HEXO has not lived up to expectations, the recent trend has been to the upside and this is an opportunity that caught our attention. Despite the closing down of a Canadian cultivation facility, we expect HEXO to produce more cannabis in 2020 than it did in 2019. We are cautiously optimistic with HEXO and will monitor how the story evolves from here.
- Aleafia Health Inc. (ALEF.TO) (ALEF) has been a clear beneficiary of the rising demand for cannabis in Canada. During the last two quarters, the company has reported positive adjusted EBITDA and we are bullish on this trend. For five consecutive quarters, Aleafia Health has reported revenue growth and we believe the business has reached an inflection point. The company has recently received license amendments to significant increase the amount of cannabis that it can produce, and we are bullish on this. Going forward, Aleafia Health also plans to develop cannabis 2.0 products and we believe that the business has substantial potential catalysts for growth. When compared to leading Canadian LPs, Aleafia Health has been growing at a faster rate and has been doing so in a cost-effective manner. We believe that this is a testament to the strength of the management team and is an opportunity with an attractive risk-reward profile.
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Published at Thu, 11 Jun 2020 11:47:32 +0000