Curaleaf Evaluation Approaching Legalization (CURLF)


Cannabis stocks briefly soared after President Biden declared his intention to pardon federal convictions related to cannabis possession and seek a factory rescheduling. Those gains have faded – giving investors another chance to buy cannabis stocks ahead of a potential a short-term catalyst takes place. Curafeuille (OTCPK: CURVE) released second-quarter results that reflected ongoing macroeconomic headwinds. The company has pulled some levers to generate higher margins and remains well positioned to benefit from future long-term growth. The stock trades at a noticeable premium to its peers due to its large footprint, although it is unclear whether this premium is warranted. Stock is cheap here nonetheless, and the company’s European footprint may help set it apart from other US carriers.

CURLF stock price

After peaking at around $17 per share in early 2021, CURLF has since fallen nearly 70% to date, giving up most of its gains following Biden’s announcements.

Curafeuille share price
Data by YCharts

I last covered CURLF in May, where I compared him to Canadian producer Tilray (TLRY). While the fundamentals face short-term headwinds, the stock continues to trade low relative to the long-term opportunity.

Is federal cannabis legalization coming in 2022?

On Thursday, October 6, President Biden announced that he was pardoning all previous federal cannabis possession offenses.

Tweet from President Joe Biden


In addition, he also immediately called the attorney general to reschedule the plant. This sent cannabis stocks briefly higher although they have since given up most of those gains.

Legislative reform can have a huge impact on cannabis stock prices. In addition to the general increase in investment hype, decriminalization could allow institutional capital to enter the sector, leading to a long-awaited rise in stock prices. From a fundamental perspective, investors are hoping for a 280th tax resolution, forcing US cannabis companies to pay unusually high tax rates due to their inability to deduct normal operating expenses from income. taxable. Even if legislative reform stops before legalization, a lesser SAFE Banking reform plan would lower the cost of capital by allowing institutional investments to lend to the sector. Now that President Biden has officially signaled his intention to begin cannabis reform, the future is finally bright for an industry in desperate need of good news.

What is Curafeuille?

CURLF is a US-based cannabis operator with 136 retail outlets and 26 grow locations across 22 states.


August presentation

Last quarter, the company had a 75%/25% retail/wholesale split in its operations.

The US cannabis market is a high-growth sector that most investors may not be familiar with. Indeed, cannabis remains illegal at the federal level, preventing most investment institutions from investing in the sector – despite the enormous potential. Retail investors don’t face the same restrictive mandates, although they must confirm which brokerage firms allow the purchase of US cannabis stocks. The US legal market is expected to grow at a rate of 14% to reach $45 billion by 2026.

legal market projections

August presentation

Much of this growth will come from the ongoing legalization of cannabis at the state level. Multi-State Operators (“MSOs”) like CURLF continue to position themselves for such growth by licensing or acquiring operators prior to this legalization.

Unlike other US operators that have generally focused on domestic operations, CURLF has looked overseas in Europe through its previous acquisition of EMMAC. CURLF is optimistic that it will have a first-mover advantage in Europe when countries inevitably legalize cannabis.

European footprint

August presentation

Immediately after reporting its results, CURLF also announced that it had acquired a majority stake in Four 20 Pharma GmbH, a medical cannabis operator in Germany. Germany is expected to legalize adult-use sales soon, making the partnership a potential way for CURLF to gain a preliminary footprint in the country.

Key indicators of CURLF actions

Historically, CURLF has been considered one of the largest cannabis operators in the United States, one with the largest footprint and respectable but not the highest profit margins. This past quarter continued that trend, with revenue growing 8% sequentially and 8% year-over-year. Gross margin was 51.9%, a notable increase from the 49% it typically operated at. Gross margins increased due to the company focusing more on vertical integration and placing more emphasis on wholesale in higher margin states.

CURLF also showed some EBITDA margin expansion, delivering adjusted EBITDA margins of 25.5% in the quarter – up from the quarter of 23.3% sequentially, but down from at the level of 27% year-on-year.

The company generated $12 million of positive operating cash flow in the first half of this year. During the quarter, CURLF operated at break-even pretax operating income, but recorded $45.1 million in income taxes. U.S. cannabis operators are unable to deduct operating expenses from taxable income when calculating income tax, so income tax is effectively calculated based on gross profits (this is again due to the fact that cannabis is federally illegal).

CURLF ended the quarter with $187 million in cash versus $587 million in debt.

Looking ahead, CURLF achieved approximately $1.45 billion in revenue and $406 million in adjusted EBITDA for this year.


August presentation

On the conference call, CURLF hinted that this could be at the bottom of the guidance – I wouldn’t be surprised if the company ends up lacking guidance, given the multitude of failings in the industry. CURLF management also said on the conference call that it intends to convert financial reporting to US GAAP no later than the first quarter of next year. Currently, Verano (OTCQX:VRNOF), Trulieve (OTCQX:TCNNF) and Green Thumb Industries (OTCQX:GTBIF) of the “Big 5” already publish US GAAP financial statements (Cresco Labs (OTCQX:CRLBF) is the latest member of the Big 5).

Is the CURLF stock a buy, sell or hold?

At recent prices, CURLF is trading at a significant premium to its peers.


Cannabis Growth Portfolio

This premium is important on the basis of the price/sales ratio, and even more on the basis of the multiples of EBITDA. Based on 2023 estimates, CURLF trades at 3x sales and 11x EBITDA. These multiples are significantly higher than Tier 1 peers, as even Green Thumb trades at around 9.5x EBITDA. Yet CURLF’s valuation is at a sharp discount to the 15 to 18 times EBITDA multiple of alcohol companies such as Constellation Brands (STZ) and Boston Beer (SAM), even though US cannabis companies have much stronger growth prospects. While growth is expected to be lumpy in the near term due to heavy reliance on state-level legalization, the long-term thesis remains intact. It is inevitable that more states will continue to legalize cannabis for adult use sales as more people begin to appreciate the plant for its recreational and medical applications. There are two main risks to consider here. First, US cannabis operators face immense financial hardship due to strict regulations. I have already mentioned difficult taxation, but these operators also have limited access to capital markets, although this element has improved considerably in recent years in line with rapid growth rates. A trader-specific risk with CURLF is the potential for the management team to focus more on revenue growth without sufficient attention to long-term earnings per share. Their presentations and commentaries often showed admiration for their large footprint and revenue base – it remains to be seen whether the company can eventually increase its profit margins or will be burdened with an expensive footprint and not enough capital to support it. invest in it. . I still consider CURLF a strong buy due to the severe undervaluation, but I emphasize my preference for higher margin peers. That said, given the bright outlook sparked by Biden’s announcement, it may make sense to hold a diversified allocation to higher-quality operators in the sectors.

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