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Money Investors are delusional when it comes to Canadian marijuana companies

18:05  10 january  2018
18:05  10 january  2018 Source:   macleans.ca

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As the July deadline for the provinces to legalize marijuana approaches, the stock prices of Canadian publicly-traded weed producers have been on a tear. But as these companies , some valued in the billions of dollars despite generating no profits, continue to attract starry-eyed investors , it ’s worth

As the July deadline for the provinces to legalize marijuana approaches, the stock prices of Canadian publicly-traded weed producers have been on a tear. Your source for global cannabis industry news! You are here. Home 🌿 Marijuana Business News 🌿 Investors are delusional when it comes to

a group of people standing in front of a building: Marijuana plants grow in a climate controlled growing room at Tweed Inc., now Canopy Growth, in Smith Falls, Ontario in 2015. (James MacDonald/Bloomberg/Getty Images)© Used with permission of / © Rogers Media Inc. 2018. Marijuana plants grow in a climate controlled growing room at Tweed Inc., now Canopy Growth, in Smith Falls, Ontario in 2015. (James MacDonald/Bloomberg/Getty Images)

Allan Gregory is a professor of economics at Queen’s University.

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Canadian Tire Corp Ltd

CDNAF

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As the July deadline for the provinces to legalize marijuana approaches, the stock prices of Canadian publicly-traded weed producers have been on a tear. On Monday alone shares in Canopy Growth Corp., soared nearly 20 per cent. The surge in market value comes as firms try to position themselves with sufficient product to meet anticipated demand. But as these companies, some valued in the billions of dollars despite generating no profits, continue to attract starry-eyed investors, it’s worth examining what kind of opportunities will exist for these firms when provinces regulate retail pot sales. It is not difficult to predict profit margins will fall under regulation and that current market cap valuations are predicated on unrealistic expectations.

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Some publicly traded companies have boasted that their all-in costs are in the range of 70 cents to .75 per gram which translates into profit margins of more than 80 per cent.

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While there are some variations across provinces in their distribution plans for legalized marijuana, the largest two provinces, Ontario and Quebec, intend to have provincial run outlets modelled on their government-controlled alcohol sales. Indeed, the alcohol model gives us an important clue as to how the industry is likely to shake out—and why marijuana producers face tough times ahead. Keep in mind that there will still be online purchases and the proportional divide between physical store and e-commerce is unclear. Ontario with only a planned 150 outlets might give us an early indication as to online traffic. But let us consider the possible ramifications from only the government outlets.

READ: How big is Canada’s marijuana market, really?

The Ontario Liquor Control Board (LCBO) and Société des alcools du Québec (SAQ) effectively have a monopoly on the sales of most alcohol products in their respective provinces (with the exception of beer and some wine). The LCBO is one of the world’s largest buyers and demands much from its suppliers in terms of large quantities and price discounts. Minor producers, even in Ontario, who are unable to meet the demands of the LCBO must sell their products elsewhere.

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Giant provincial alcohol buyers with market power drive tough bargains in terms of price and quantity which dissipates suppliers’ profits. Of course, having a virtual monopoly on the retail side has meant that these pricing discounts are rarely passed onto its customers. I see the same tactics for recreational marijuana. There is the false belief that the licensed producers (LPs) of marijuana will get the same price from the provinces they have enjoyed in the retail-based medical market business.  However, aggressive bulk buying by large provincial authorities will whittle the producer price down markedly.

Provincial buyers are going to want to deal with licensed producers that can supply large amount of product at low prices. At present the average price of medical marijuana is roughly $10 per gram. Some publicly traded companies have boasted that their all-in costs are in the range of 70 cents to $1.75 per gram which translates into profit margins of more than 80 per cent. However, we can expect provincial agencies will severely cut into these margins. The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect. In a recent study on Ontario Wine and Grape Industry (2015), for large scale operations the profit margins are just under 15 per cent and in fact many smaller vineyards were posting losses.

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Investors are delusional when it comes to Canadian marijuana companies . The model of state-run alcohol sales gives us an important clue as to why Investing . Dual class shares are in fashion again—but they’re still a bad idea. When times are good, dual-class shares can promote long-term

It was renamed Canopy Growth, the world’s largest marijuana company . As former chief financial officer of the Liberal Party during the last election when Prime Minister Justin “Something could clearly go wrong in the U.S. when it comes to cannabis, but it certainly wouldn’t in Canada ,” she said.

READ: Ottawa’s dangerous hustle to legalize weed

Meanwhile at implementation this will likely mean only the largest producers will be entering into contract with the provincial authorities. The notion of boutique suppliers of cannabis will have to wait, just like craft beer producers waited in alcohol sales. Establishing reliable supply lines will dominate initially any gourmet pot considerations.

Will provinces favour producers in their own backyards? Of course they will. Just as Ontario has favoured its own wine industry and shelves mostly their products for the domestic lines in their stores, so will it be true for provincial distributors. For instance, if you are a cannabis producer hoping to sell in Canada’s biggest markets, you will likely need a physical grow-op in Ontario or Quebec. This means regional producers will face additional barriers to growth. At present only the government of New Brunswick has announced a commitment to Organigram, a Moncton-based producer, to buy five million grams a year. The company, which has seen its shares soar 31 per cent in value so far this year, estimates that deal will translate into a retail value of $40 million to $60 million. (At present, Organigram’s market value stands at $630 million.) Other provinces will soon follow suit I believe and strike distribution arrangements for local provincial growers.

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Companies on Canadian exchanges are shown in $CAD. The U.S. Marijuana Index tracks the leading cannabis stocks operating in the United States. Constituents must have a business strategy focused on the marijuana or hemp industry, and are required to meet our minimum trading criteria.

When it comes to the potential legalization and regulation of recreational marijuana , Canadian businesses, governments and consumers alike are entering uncharted terrain. While there is plenty of useful data to be gleaned from external markets ‐ most notably those in the U.S. that have already

As in many stock market interactions, the industry tells a rosy story of growth and opportunity. But I would suggest a careful recall of the dot com bubble offers a somber warning. Canopy Growth Corp. is currently valued at just over $7.5 billion yet loses about 12 cents a share. At the same time, Canadian Tire Corp. has a valuation of $11.5 billion and earns $10 a share—and pays a dividend yield of 2.14 per cent.  What company offers a better long-term investment?

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Canadian marijuana stocks have a serious accounting problem .
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