|
As signs of spring emerge in the Great White North, green shoots are also
poking through the landscape from companies eager to supply the rapidly
growing North American market for cannabis products.
This market involves everything from transportation, packaging, retail
stores, cafes, and smoking paraphernalia, to oils, creams, greenhouse
products and testing equipment. There will also be a greater need for
investment banks and other lenders who can help cannabis companies to
leverage their businesses.
The cannabis supplier market has so far been overlooked by retail
investors, most of whom have gravitated towards the big licensed producers
like Canopy Growth and Aurora - growers that saw huge gains in the lead-up to
legalization last fall.
Indeed, marijuana producers in Canada “ain’t seen nuthin” if
and when cannabis is legalized in the US at the federal level, and pot is
opened up to Big Tobacco companies, who are experts in consumer product
marketing. Think of “The Marlboro Man”.
This article will take a look at trends in this emerging sector
and offer a few examples of companies with some bright ideas.
Next wave
“To me, that’s the next wave we’re going to watch, is the evolution of the
way the industry gets serviced,” Dan Barclay, head of BMO Capital Markets
global investment and corporate banking, was quoted
in the Financial Post.
The marijuana-friendly Canadian bank is reportedly paying attention to the
distribution system for cannabis, which fits with a report last fall from
DBRS, a ratings agency, that predicts “new participants will enter the
industry at different stages of the supply chain.”
LP stocks stagnant
Last September was the time to own, and sell, pot stocks. If you’re still
hanging on to yours, I’m afraid you’ve missed the peak. One of the largest
cannabis producers, Tilray, reached a market cap of $20 billion - more
than companies in the S&P 500 - before massive selling wiped all those
gains out a week later. Canopy Growth and Aphria also hit their
all-time highs last September. For Aurora, October was the pinnacle of its
chart. All of these stocks saw steep drops to December. They’ve
since come up a bit, but the bubble appears to have popped. Licensed producer
(LP) stocks have stagnated.
Perhaps a bit late, pot investors should have heeded the warning of Mitch
Goldberg, president of investment advisory
firm ClientFirst Strategy, writing a column about cannabis
investing published
Sept. 24, 2018 on CNBC.
In it, Goldberg states that “pot is a commodity” like any other, meaning
the profits will go to the best growers. Failing to produce a marijuana crop
at reasonable cost carries the same consequences as farmers whose orange crop
fails or a coffee grower whose production costs exceed the selling price. “No
company can escape the ups and downs of its input costs, whether that is
agriculture or mining products,” he writes. “Why would cannabis-related
companies be able to avoid the same issues?” Pot is also subject to booms and
busts. Too much supply will cut the price, and vice versa, something Canadian
pot consumers have yet to see here.
Big brand menace
Anybody who has watched the Netflix series ‘Madmen’ understands the power
of the US tobacco industry. The fictional advertising firm Sterling Cooper’s
anchor client is Lucky Strike. When the iconic American cigarette maker
suddenly announces it won’t be renewing its contract, the firm is in deep
trouble.
For decades, despite the Surgeon General’s warnings, Big Tobacco ruled the
advertising roost. These days, the tobacco industry is struggling, with most
of the developed world spurning the cigs and cigars. In North America, the
trend is towards pot, and with legalization in 11 states and whisperings of a
relaxation of federal prohibition, big cigarette makers are salivating.
They know that the cannabis industry, both in Canada and the US, has a
problem: consumers don’t buy brands, they buy weed strains. What matters is
the kind of marijuana, not the name on the packaging. In fact, few consumers
even know, or care, who grew the product they’re about to smoke.
A survey taken on the day recreational marijuana was legalized, last
October, found 95% of Canadian customers were “unaware of the brands they had
just purchased.” This must partly be due to the fact that the
Cannabis Law in Canada restricts how much the product can be marketed.
However even in the US, the land of unfettered capitalism, research says
most Americans still buy weed from friends or dealers. Ads in legal marijuana
states are often confined to roadside billboards, according
to Investor’s Business Daily, which adds, “To stand out, top marijuana
companies are turning to sleek packaging, cute names and even celebrities
like Martha Stewart.” Something that cannot be done in Canada.
They’re all trying to reserve a position
in the US cannabis market, which if full federal marijuana legalization kicks
in, could be worth $80 billion by 2030.
How will such a behemoth of an industry look? Macquarie, the Australian
bank, stated last November it’s likely to come down to a few key players.
“Since cannabis and hemp are ingredients, we believe the sustainable value
will be in branded products and that brand building will be costly and
unpredictable,” the Macquarie analysts said. Who has the deep pockets to
accomplish such brand building? Big Tobacco.
Other than the multi-billion-dollar opportunity in branding cannabis
products, these large cigarette companies have other reasons in doing
so. Marketwatch
lists seven, including declining sales.
Tobacco companies have large distribution networks already set up to
target smokers and could easily switch to cannabis customers. Big Tobacco is
also an expert lobbyist, and good at navigating regulations - something pot
companies are still grappling with.
The popularity of smoking cigarettes has waned considerably, while
marijuana is likely to see explosive growth. The health risks of cannabis are
increasingly seen to be less than tobacco.
A recent Quebec
Court of Appeal decision that went against Canadian subsidiaries of
three large tobacco companies - ordering them to pay smokers about $17
billion in damages - is motivation to reduce their exposure.
Read
an article by BNN Bloomberg to learn how Big Tobacco is diversifying
into e-cigarettes and cannabis, including Altria Group’s $2.4 billion
investment in Canadian cannabis producer Cronos Group, for a 45% stake.
Altria, parent company of Philip Morris, is best known for Marlboro
cigarettes.
Another key point about the challenges Canadian licensed producers face in
gaining North American marketshare, is the government not willing to get
out of the way. Unlike US states, the Canadian government is maintaining a
vice-like grip on the way pot and pot products are produced and distributed.
And Canadian marijuana companies’ first-mover advantage (as the first G20
country to legalize) has been eroded by the Toronto Stock Exchange.
The TSX will delist any Canadian company with marijuana dealings in the
US, due to the federal prohibition on cannabis. This puts Canada’s publicly
traded licensed producers, and any other TSX-listed firm with a
marijuana-related business, at a disadvantage to American companies, who can
operate freely in Canada.
“It’s probably fair to say that Canadian operators are being hamstrung by
policy,” George Allen, president of Acreage Holdings, a U.S. cannabis
investment company listed on the Canadian Securities Exchange, told
the Financial Post in a January article. “I respect what my peers in
Canada have built in terms of footprint and scale, but in terms of its
relevance to the U.S. market, especially once we’re federally legalized, they
might as well be growing tomatoes.”
Regulation: blessing and curse
Goldberg, the above-cited CNBC author, advises clients not to
underestimate the power of regulators, particularly with respect to cannabis
products geared towards consumers versus medical marijuana patients.
“Alcohol and cigarettes certainly are regulated. You can't even buy
Sudafed without showing your ID to the pharmacy. Regulatory uncertainty in
this market should remain a headwind for a long time,” he writes.
A headwind for some companies, a tailwind to others.
For companies that make consumable cannabis products like edibles and
infused drinks, getting their product sold in the US could prove daunting.
Even if the US government bends to full legalization, it seems extremely
likely that any new cannabis products will have to be passed by the Food and
Drug Administration (FDA), the USDA Food Safety and Inspection Service, etc.
To think otherwise is just being naive.
Companies that manufacture and market equipment, or provide services, that
will assist companies to overcome the expected onslaught of regulations that
would accompany full legalization, would of course stand to benefit. This
includes makers of cannabis test kits, and equipment that helps growers,
distributors and retailers to meet federal standards.
4 new players
3 Sixty Secure Corp delivers
security solutions for the cannabis, law enforcement, oil and gas, mining,
government and industrial sectors. 3 Sixty transports about $250 million
worth of product a month and has expanded to serve more than 60 licensed
producers in Canada.
FluroTech (TSX-V:TEST, OTCQB:FLURF) is
the first-mover in cannabis testing with disruptive
spectroscopy analytical testing devices. The company’s revenue model
involves selling testing devices to licensed cannabis producers, retailers,
companies that do drug testing, and law enforcement
agencies. FluroTech was recently nominated for Best Testing
Facility. The winner will be honored at the 2019 O’Cannabiz Awards
Gala, April 25 in Toronto.
Vitalis provides
a safer, cleaner way to extract plant oils using carbon dioxide. Based in
Kelowna, BC, Vitalis’ pressure equipment meets ASME and CSA standards for
boiler, pressure vessel and pressure piping code, and carry CRN and NB
registration numbers as confirmation. Vitalis was awarded Top Extraction
Equipment at both the 2017 and 2018 LIFT & Co. Awards.
Remo
Nutrients provides plant feeds containing vitamins, minerals and
extracts that help plants to achieve their maximum growth potential. Based in
Maple Ridge, BC, Remo Nutrients has eight product lines that can be used in
soil, soil-less and hydroponic settings.
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no
responsibility or liability as
to its accuracy or completeness. Expressions of opinion are those of
Richard Mills only and are subject to change without notice. Richard Mills
assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion
or statement contained herein or any omission. Furthermore, I, Richard Mills,
assume no liability for any direct or indirect loss or damage or, in
particular, for lost profit, which you may incur as a result of the use
and existence of the information provided within this Report.
FluroTech (TSX-V:TEST, OTCQB:FLURF) is an advertiser on Richard’s
site aheadoftheherd.com.
|
