February 06, 2021 - 3:01pm EST by
2021 2022
Price: 31.50 EPS 0 0
Shares Out. (in M): 66 P/E 0 0
Market Cap (in $M): 2,085 P/FCF 0 0
Net Debt (in $M): 65 EBIT 160 313
TEV ($): 2,150 TEV/EBIT 13.4 6.9

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AYR Strategies (AYRWF)

Author:  Moneyball February 6, 2021

The cannabis industry is one of the best performing stock groups year to date in 2021,  and AYR Strategies (AYRWF)  is one of the best ways to invest in this high growth industry. The public cannabis companies are severely under-valued because cannabis (Marijuana) is an illegal substance at a federal level,  even though it has been legalized in over a dozen states. Since cannabis is illegal at the federal level, compliance officers at regulated investment firms such as mutual funds, banks and pension funds prevent these institutions from investing in the public cannabis companies operating in the United States. A review of the largest shareholders at these firms will show brand name firms such as Fidelity Investments or Vanguard do not own shares in these companies. 

The Democractic party does support the legalization of cannabis, and they now control the Senate after winning two more seats in the January 2021 Georgia Senate run-off election. President Biden will soon pass a trillion dollar stimulus bill that will likely include riders  that include language that supports legalization of cannabis. That is why the cannabis stocks are appreciating. This will allow billions of dollars controlled by mutual funds, banks and pension funds to invest in the cannabis stocks. Investment banks such as Goldman Sachs and JP Morgan will also be able to recommend these cannabis stocks to their clients. 

If you the reader work at a firm that is not prohibited from investing in US cannabis stocks, you have an opportunity to purchase shares in these cannabis stocks while they are still undervalued.  I have compiled below a list of all the US cannabis stocks that have a market capitalization that exceeds $1 Billion. My favorite stock among this group of nine stocks is AYR Strategies.  The stock price is severely undervalued trading at 7x times 2022 EV/EBITDA compared to a 17.4x EV/EBITDA average for the group. The First Call consensus  forecasts that AYR’s EBITDA will grow year over year in excess of 100% in 2021 and 2022. The company has $260 million in cash on its balance sheet, which can pay for all the capital expenditures required to achieve the 2022 EBITDA estimates. 


Valuation Below For Cannabis Stocks  (Before Federal Legalization) as of Feb. 5, 2021

There are nine public cannabis companies that operate in the United States which have market capitalizations that exceed $1 Billion. 

The average 2022 EV/EBITDA multiple for these companies is  17.4x

AYR Strategies has the lowest 2022 EV/EBITDA multiple among these stocks at 7x

Valuation Below That Is Possible After Cannabis Is Legalized:

The commentary above shows that the USA cannabis stocks are valued at 17.4x times EV/EBITDA based on 2022 estimates.   This valuation should rise once mutual funds and pension funds are permitted to invest in cannabis stocks later in 2021 or 2022.  

Another comparable valuation group would be “legal” consumer goods companies. I have selected a group of six consumer goods companies from the alcoholic beverage, Fragrance and beverage industries. The tickers for these companies are SAM, STZ, EL, L’Oreal, KO and MNST.    These stocks are currently valued at 22x times 2022 EV/EBITDA. These companies only grow EBITDA about 10% a year, so it is reasonable to expect the cannabis stocks to trade at even higher valuations as EBITDA for the cannabis industry will likely grow at a 25% annual compounded rate for several years.

(Note: Legal consumer goods companies are firms such as Coca Cola where there are no investment restrictions.  All mutual funds and pension funds can legally invest in these stocks.)

M&A Will Also Drive Valuation Higher For Cannabis Stocks:

There are numerous companies in the beverage, pharmaceutical, retail, gaming, and tobacco industries that would like to enter the cannabis industry, but have been prevented from doing so. Once cannabis legalization takes place at the federal level,  some “outsiders” will seek to enter the industry via acquisitions. The first such acquisition was announced on Feb 3rd with Jazz Pharmaceuticals announcing its acquisition of GW Pharmaceuticals with an offer to pay 8.8x times 2021 sales.  GW Pharma has expertise in using ingredients from cannabis plants for medical purposes. 


What is the right valuation level for cannabis stocks?

In 2020 it is estimated that sales in the United States legal cannabis industry grew in excess of 30% in the midst of a pandemic induced recession.  The public companies grew faster as they had access to more capital, which they directed towards organic growth and acquisitions.  The legal cannabis industry generated estimated sales of $15 Billion in 2020 compared to the $55 Billion in sales of illegal cannabis.  It is expected that as all 50 states legalize cannabis the vast majority of illegal cannabis sales will migrate into the legal marketplace. This suggests that sales in the legal cannabis industry can grow over 300% in the next 5-10 years. 

The business is extremely profitable with some companies already reporting 50% EBITDA margins and pre-tax return on capital in excess of 100%.  These incredible margins may also be sustained in states where regulators have limited the number of cannabis license holders and thus limited the amount of competition.

Right now the US cannabis industry operates  under the IRS 280e tax code due to the Controlled Substance Act. This results in a 70% corporate tax rate.  President Biden favors raising the US corporate tax rate from 21%


Laws passed at the federal and state levels that legalize cannabis.

Regulated investment firms such as mutual funds and pensions funds given approval to invest in cannabis stocks

Continued cannabis retail same store sales that usually exceed 30% year over year.

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