After a spectacular run in 2021, cannabis stocks are trailing the broader markets by a wide margin in the last 30 months. The pullback provides you with an opportunity to buy the dip and gain exposure to quality cannabis stocks at a discount.
One such licensed marijuana producer is Verano Holdings (VRNOF), which trades 82% below all-time highs.
Valued at a market cap of $1.2 billion, Verano is engaged in cannabis cultivation, processing, and distribution. Its brands include Encore, MUV, Avexia, Savvy, BITS, and Verano. It also designs, builds, and operates branded retail environments, including Zen Leaf and MUV dispensaries.
Let’s see if it makes sense to invest in this cannabis growth stock that trades under $5 in June 2024.
The Bull Case for Verano Holdings
With a presence in 13 U.S. markets, Verano Holdings has 13 cultivation and production facilities and 140 operational retail locations. Verano has a strong presence in Florida, and aims to gain traction in markets such as Ohio and Pennsylvania, where recreational use of cannabis is set to be legalized in the near term. Verano already operates 100 retail dispensaries in these three core markets, where cannabis is legalized for medical use.
In Q1 of 2024, Verano reported revenue of $221 million, down 3% year over year. The decline in sales was attributed to lower revenue from New Jersey, where dispensaries continue to open across the state.
The company ended Q1 with a gross profit of $113 million, or 51%, higher than the year-ago profit of $109 million, or 48%. Higher third-party wholesale revenue drove the company's gross margins higher.
However, new dispensary openings and additional investments in technology meant Verano’s operating expenses stood at $90 million, up from $75 million in the year-ago period. It reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $67 million, indicating a margin of 30%.
Verano’s enviable profit margins meant its operating cash flow almost doubled to $31 million from $17 million in the last 12 months. With capital expenditures of $10 million, Verano reported a free cash flow of $21 million in Q1, up from just $8 million last year.
A positive free cash flow allows Verano to target accretive acquisitions and reinvest aggressively in growth projects, which should drive future cash flows higher.
Verano Launches a Stock Buyback Plan
Last week, Verano Holdings announced that its board of directors authorized a repurchase plan of up to $50 million. Generally, a share buyback plan is viewed as a positive corporate action on Wall Street as it indicates that the management believes company shares are undervalued.
Verano’s CEO, George Archos, explained, “Our longstanding commitment to operational excellence alongside our focus on capital discipline has set up Verano to generate consistent revenue growth, deliver strong margins, and produce leading cash flows. The authorization of our first-ever share repurchase program provides an additional outlet for capital deployment alongside other measures such as capital expenditures, strengthening our balance sheet, and potential M&A as we position Verano for long-term growth and success.”
What is the Target Price for Verano Stock?
Out of the seven analysts covering Verano stock, five recommend “strong buy,” and two recommend “moderate buy.”
Priced at 1.2 times forward sales, Verano stock is quite cheap. The average 12-month target price for VRNOF stock is $8.27, indicating an upside potential of nearly 137% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
