In recent years, Canada and the U.S. have established North America as the epicenter of a global cannabis industry. The North American legal marijuana market accounts for virtually all legal cannabis sales in the world today and is forecast to grow to US$32 billion in annual sales by 2022, according to Arcview Market Research.
Medical marijuana has been legal in Canada since 2001, and the country will launch adult-use sales in October. In the U.S., medical marijuana is now legal in 29 states, and adult use is legal in nine states, including California, the country’s most populous state and the fifth largest economy in the world. About a third of Americans live in state with some form of legal marijuana, and a fifth live in a state where adult use is legal.
The rise of legal marijuana has created a “Green Rush” in North America with investment pouring into the sector to capitalize on its rapid growth. Although it would be easy to see North America as a whole when it comes to the cannabis market, it is instructive to examine the sharp contrasts between the two sides of the border.
The U.S. cannabis consumer market dwarfs Canada’s. State-sanctioned cannabis product sales in the U.S. are forecast to reach the US$11 billion mark this year compared to US$1.3 billion in Canada. California alone is expected to reach US$3 billion in sales. In states like California and Nevada, consumers today have access to literally thousands of cannabis products from pre-rolled joints to vaporizers, edibles and bath bombs. In Canada, licensed medical marijuana producers offer a much more limited product selection, mainly dried flower and oils, via mail. Retail stores are currently prohibited in Canada, but they will be allowed when adult-use sales begin in October. It will still be a while before Canada’s retail scene resembles anything like California and Nevada.
By contrast, the U.S. is far behind Canada when it comes to public capital markets for cannabis. With the exception of three Canada-based cannabis companies traded in the Nasdaq and NYSE, there is no real, bona fide public capital market in the U.S. to speak of. In Canada, the federal endorsement of medical marijuana has led to a thriving capital market for marijuana stocks with most of the major players being traded in the Toronto Stock Exchange. In recent years, U.S. based cannabis companies gave gone north of the border to the Canadian Securities Exchange in search of investors and liquidity.
The imbalance between consumer and capital markets on the two sides of the border has created a significant arbitrage opportunity for investors. The combined market capitalization of the five largest publicly traded cannabis companies in Canada is US$16.1 billion. By contrast, the five top U.S. companies on the Canadian Securities Exchange add up to US$3.6 billion in market capitalization.
Listing of Top 5 Licensed Producers By Market Cap – Canada (Left); U.S. (Right)
MedMen vs Aurora
Examining two of the market leaders on each side of the column highlights the imbalance.
MedMen Enterprises Inc. (CSE: MMEN) (OTCQB: MMNFF) has a market cap of US$1.5 billion (based on Friday’s closing). Aurora (TSX:ACB) is valued at US$5.2 billion.
Aurora is currently the second-largest licensed producer in Canada and is closing in on acquiring the third-largest producer, MedReleaf Corp. (TSX: LEAF), via an all-stock transaction. From inception, Aurora’s focus, like with most of its Canadian peers, has been on production capacity. The company’s 11 production facilities are forecast to have a combined annual output of 550,000+ kg when complete. The company also has plans to spin off its American assets to take advantage of U.S. retail, and it is looking to develop recreational cannabis brands for Canada’s adult use market. With the acquisition of MedReleaf, the consensus estimate for revenue at Aurora for Fiscal 2020 is US$681 million (C$894 million). That makes Aurora’s valuation a 7.6x multiple of revenue.
What’s clear is that if investors are bullish about the Canadian players, which there is plenty of reason to be, they ought to take a much closer look at the opportunities in the U.S.
MedMen has a robust retail presence in the most important markets in the U.S. The company currently operates 14 stores in California, Nevada and New York, in marquee locations like Beverly Hills, New York’s Fifth Avenue and Downtown Las Vegas. The company recently acquired a license in Florida to open 25 stores in that state. The company has plans for 45 stores by 2020. The company also has cultivation and manufacturing facilities in Nevada and New York, and is building a third in Desert Hot Springs, California, which is expected to come online in early 2019.
MedMen’s focus on building the most recognized retail brand in the industry is paying dividends. The company’s mature stores in California are on pace to generate over US$20 million in revenue annually. As the trend towards legal recreational sales continues in the U.S., MedMen’s 45 stores could yield US$900 million in annual revenue – without incorporating the company’s cultivation and manufacturing revenue or the joint venture in Canada. At a 7.6x multiple, this would imply a valuation of US$6.9 billion – or 5x MedMen’s current level.
At US$1.5 billion, MedMen’s current market cap is a fraction of Aurora’s pro forma valuation of US$5.2 billion and provides great exposure to the U.S. consumer market which is expected to reach US$75 billion in sales by 2030, according to Cowen. Cannabis is the fastest growing industry in North America and opportunity abounds on both sides of the border. We would, however, expect to start seeing a shift in investment focus from the Canadian public companies to those that focus on the U.S. The arbitrage is too great to ignore.
medmen.com
FULL DISCLOSURE: MedMen Enterprises is a paid client of Stockhouse Publishing.