HighGradeRootsI last wrote about Verano Holdings (OTCQX:VRNOF) in April, sticking with a Sell rating that I initiated in November 2023. The stock had rallied a bit, but I was still bearish on the name outright and especially relative to other cannabis stocks. In the original piece, the stock was at $4.39 when I suggested that readers should avoid Verano. In April, the stock had rallied to $5.07. Now, it is below $4. I am upgrading Verano to Neutral today after the price decline. In this piece, I explain why. Verano Has Underperformed Peers Verano is one of the five Tier 1 MSOs. Since my last article in April, it has underperformed the group: YCharts All are down despite spiking higher on 4/30, when the DEA announced that it was going to follow the suggestion of the Department of Health & Human Services to change cannabis from Schedule 1 to Schedule 3. This will eliminate the onerous taxation the industry faces through 280E, which is a law that essentially forces them to pay tax on gross profit rather than net profit. Going back to the original Sell article, Verano has also underperformed since then. YCharts The whole potential rescheduling news had come out in late August already, but the world was still waiting back then to hear from the DEA. Going back to the day before that news hit (August 30), Verano is up, but, again, it has lagged its peers: YCharts The Verano Chart Shows a Potential Bottom This is a stock that has dropped a lot from where it was in 2021. It is close to the very bottom that was created in 2023 and has pulled back sharply from its peak earlier this year: SchwabThe very recent low was above its low in late October, but both of those dips were into the range where the stock found the all-time low. I see support at $3 and resistance at $5.50. The Verano Outlook Has Been Falling I have been concerned about the estimates from the analysts being too high, and they have been coming down. Quite simply, the expected margin has been too high. I am using AlphaSense, and the current outlook is that revenue in 2024 will fall 2% to $921 million. In 2025, revenue is projected to grow 12% to $1.027 billion. Adjusted EBITDA for 2024 is projected to fall to $277 million. This is still a 30% margin, which is higher than peers. The large participation in the Florida market, which is vertically-integrated (limited wholesale) helps boost it. For 2025, analysts project that adjusted EBITDA will increase 18% to $328 million, a margin of 32%. The adjusted EBITDA forecasts have been declining since year-end and further as well. In the original piece in November, using Sentieo, which was acquired by AlphaSense, adjusted EBITDA for 2024 was expected to be $316 million. For 2025, analysts were projecting $344 million. I continue to project a 31% margin in 2025, and, based on the current outlook for revenue, this would be $318 million. 280E Taxation Could End If 280E taxation ends, it will be very helpful for the company. In 2023, it incurred almost $80 million of expenses due to 280E. These are extra taxes, and cannabis becoming Schedule 3 instead of Schedule 1 will automatically end that tax. 280E going away will help cash flow due to lower tax payments, and it will help net income. It will have no impact on EBITDA, of course. There is always a chance that the federal government could figure out another way to impose a tax, and companies may cut prices after the tax goes away. So, while it is a very good thing, it’s not exactly clear yet how good it is. Verano Is Cheap Outright I use enterprise value to project adjusted EBITDA to measure valuation, and Verano appears to be in line with its peers. Alan Brochstein, using AlphaSenseTrading at just 5.3X the 2023 adjusted EBITDA and less than 5X the projected adjusted EBITDA for 2025, the stock is very cheap along with most of its peers. These stocks were trading at 20X a few years ago, though growth has certainly slowed since then. I shared a target of $6.76 for year-end based on a multiple of 8X in the piece in April. Updating it for the capital structure and the current estimates, I get a year-end enterprise value projection (using my slightly lower adjusted EBITDA outlook) of $2.55 billion. Subtracting the net debt of $258 million leaves a market cap of $2.3 billion, which works out to a price of $6.49. This would represent a potential gain of 68% by year-end. My favorite MSO right now, Ascend (OTCQX:AAWH), should do a lot better than that. I explained last week my expectations for getting over $3 at just 6X. This would be a gain of about 200%. There are better gains ahead in several other MSOs in my view as well as other cannabis stocks. Conclusion I think that cannabis investors are about to experience the end of the bear market that began in early 2021 as rescheduling takes place and eliminates 280E taxation. I believe that there are better stocks to buy than Verano, but I no longer expect that the stock will potentially make a new low. Verano is risky, like all cannabis stocks. It has a negative tangible book value and a lot of debt. If 280E remains in place, Verano will not perform well at all. I suggested previously that the multiple could drop to just 3X. This would be below $2, a new all-time low. Another risk for Verano is the upcoming Florida vote. If voters fail to approve adult-use, it could weigh on this stock. I think that an enterprise value to adjusted EBITDA of 5X is a very attractive pricing, and investors should look into Verano and its peers and other types of cannabis stocks. I rate Verano a Neutral now instead of rating it a Sell, but there is still potential downside, as well as better ideas. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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