While cannabis legalization at the federal level is progressing at a slower pace than anticipated, it is widely accepted that it is only a matter of time until legislative reform of US cannabis takes place.
Jefferies’ Owen Bennett has long argued that Canadian cannabis producers should get ready for this scenario as the opportunity south of the border is far more significant than the one presented on home soil. While the latest move by Tilray (TLRY) might not immediately please investors on this front, the analyst believes it is a positive one.
Last week, the company announced it is acquiring Colorado-based Breckenridge Distillery for $102.9 million, to be paid entirely in stock.
Breckenridge is best known for its blended bourbon whiskey – a 4-time recipient of Best American Blended Whiskey from the World Whiskies Awards – and in addition to being “immediately” EBITDA-accretive – Breckenridge’s annual sales are estimated to be around $20 million with EBITDA at around $5 million – Bennett believes the new acqusition complements Tilray’s SweetWater brand. By leveraging Sweetwater’s distribution, there is “big potential” to expand nationally. Bennett sees “top-line synergy potential” while the deal “supports US THC optionality upon federal legalization.”
US THC optionality is the important part here and Bennett thinks investors might have preferred a move similar to the MedMen play – last quarter, Tilray made its first foray into US THC when it purchased “optionality” on MedMen convertible notes and laid out a path to eventually taking ownership of the company.
With capital market reform for the cannabis industry potentially on the agenda in the coming months, Bennett believes investors think the risk for Tilray is that “if they wait, US THC assets currently on depressed multiples will be significantly more expensive.”
“This is not lost on Tilray,” says the analyst, “And we believe they are just waiting for the point when there is a ‘high’ probability vs ‘good’ probability, and at that point we will see similar MedMen moves. In the meantime, one needs to remember these consumer assets can still be leveraged in cannabis but also in CBD, another sizable opportunity (CBD infused food, seltzers, and spirits all current CBD categories).”
All in all, Bennett reiterated a Buy rating on TLRY shares, along with a $22 price target, suggesting room for 170% share appreciation over the next year. (To watch Bennett’s track record, click here)
The rest of the Street’s take offers a conundrum. On the one hand, most analysts remain skeptical regarding Tilray’s prospects, with 8 Holds, 2 Buys and 1 Sell, providing the stock with a Hold consensus rating. However, the average price target remains a bullish one; at $13.6, the figure implies room for share gains of 65% over the one-year timeframe. (See Tilray stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
