The Tilray (TLRY) Q1’19 results are the epitome of our 2019 investment thesis of avoiding the large Canadian cannabis stocks. The company generated a ton of growth, but the numbers just don’t justify a $5 billion market valuation.
As with most sector stocks, the Q1 results are confusing due to acquisitions and the recent legalization of adult-use in Canada. The main form of confusion was around revenues that came in at $23.0 million while analyst estimates were down at only $20.5 million.
A big boost to revenue came from the acquisition of Manitoba Harvest that contributed to the big jump in food products revenues to $5.6 million. The medical segment revenues only grew fractionally from $7.4 million last year and huge growth in International medical revenues still only amounted to $1.8 million in revenues. Again, the global expansion forecast has left the company with an adult-use and medical focus in Canada and hemp foods in the U.S.
Tilray only sold 3,012 kgs of cannabis making the company actually a mid-tier player in the global cannabis market with a big tier stock valuation. The net selling prices were down fractionally, but the legal market is still undersupplied so these figures aren’t useful at this point. CEO Brendan Kenney now predicts the market to remain undersupplied with quality cannabis for up 18 months.
A big problem here is that the company is burning cash with a large adjusted EBITDA loss in the quarter. The market might be impressed that Tilray bought new revenue streams in the hemp food business with a future into the American CBD market, but the adjusted EBITDA losses surged to $14.6 million from a loss of only $3.2 million last Q1.
It’s rather difficult for a company to lose as much as it generates in revenue, but Tilray only generated gross margins of 23% in the quarter. The market can excuse some money losing operations in the start-up phase, but the cannabis sector is very competitive already.
The hemp foods business bought via Manitoba Harvest has an impressive distribution deal with 16,000 retail locations in the U.S. and Canada, but the numbers aren’t supportive of decent financials. Due to the closing in early March, the quarterly reported numbers of the business were actually far below the projected quarterly revenues of $20 million, but the financials highlight why Compass Group Diversified Holdings (CODI) was willing to unload the business for only $310 million and mostly in cash.
Compass is an expert in these middle market businesses so the market might be overplaying the potential here.
The key investor takeaway is that Tilray will report substantial revenue growth in 2019 via adding the additional revenue from Manitoba Harvest plus the move into CBD products. In addition, the company has operations opening up in Portugal to supply business in Europe.
The market will need to shift focus to margins as the hemp foods business isn’t exactly the cannabis market that investors wanted to own here. Right now, Tilray offers a business that is a dime a dozen, but the stock valuation is the only distinguishing factor.
Tilray Inc. shares were trading at $47.89 per share on Friday morning, up $0.30 (+0.63%). Year-to-date, TLRY has declined -32.11%, versus a 14.93% rise in the benchmark S&P 500 index during the same period.
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