Echelon Capital Upgrade Echelon Capital Markets analyst Andrew Semple thinks the Democratic party taking control of the U.S. Senate accelerates the prospect of federal cannabis reform, supporting valuations for U.S. operators.
In a research note released late Wednesday, he said the victories in the Georgia run-off elections prompted him to update his valuation parameters for companies in his coverage universe.
“Across our U.S. cannabis coverage models, we previously used a discount rate of 15 per cent, reflecting the high cost of debt and equity capital for these businesses largely attributable to the current status of federal cannabis regulations. We firmly believe the U.S. cannabis industry will eventually move towards a normalized WACC of 4–6 per cent (in the context of current market conditions) seen in more traditional CPG companies if/when full federal legalization occurs. This has significant implications for long-term valuations across the sector.
“At this time, we are moving our discount rate to 12 per cent for most of our U.S. coverage names due to our view that federal cannabis reform will be accelerated and greater clarity on the regulatory path forward with Democratic control of the U.S. Senate. In particular, we look for the near-term passage of the SAFE Banking Act (federal cannabis banking reform) in 2021. We also believe it is likely that progress will be made on the MORE Act (federal cannabis decriminalization, among other important provisions) towards the latter half of 2021 or possibly later if COVID-19 requires additional attention from lawmakers.”
With those changes, he raised his target prices for stocks in his coverage universe, including:
- Ayr Strategies Inc. (AYR.A-CN, “buy”) to $58 from $53. The average on the Street is $44.25.
- Columbia Care Inc. (CCHW-CN, “speculative buy”) to $13 from $11.50. Average: $9.89.
- Cresco Labs Inc. (CL-CN, “buy”) to $16 from $14.50. Average: $16.49.
- Green Thumb Industries Inc. (GTII-CN, “buy”) to $38 from $34. Average: $37.36.