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In my previous analysis on March 11, 2024, covering Curaleaf Holdings (OTCPK: CURLF), (Toronto Stock Exchange:CURA: THAT), I recommended a rating of “Buy”. Since then, Curaleaf’s stock price has increased by approximately 46% versus only 3.7% by the S&P 500 Index. Compared to peers such as Trulieve or Green Thumb Industries, Curaleaf has stood out and managed to realign stock prices over the past few months.
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The effect of cannabis rescheduling such as the removal of the 280E tax is widely taken into account at the moment. Investors may have developed overconfidence in these U.S. multi-state cannabis operators (“MSOs”) over the past few months. Although Curaleaf’s Q1 2024 financial results are generally positive, I would like to change my rating to “Hold” at this time.
2024 Q1 financial results
During the first quarter of 2024, Curaleaf reported net revenue of $339 milliona year-over-year increase of 2% from first quarter 2023 revenue of $333 million.
On the domestic side (revenues from the United States), while wholesale revenues increased by 11%, retail revenues declined by 2% on a year-over-year basis, leading to an overall decline in domestic revenues of 0.5% or $1 million. This is slightly worrying as Curaleaf is losing market share to its peers. Trulieve reported a 4% increase of turnover in the first quarter of 2024 compared to the first quarter of 2023.
On the international stage, Curaleaf’s performance has been remarkable. Its international revenue increased by 59%, from $12.6 million in the first quarter of 2023 to $20 million in the first quarter of 2024.
Curaleaf reported overall gross profit of $161 million and a gross margin of 47%. As expected, Curaleaf’s gross margin continued to improve from 2023 (46%) now that it has exited overly competitive states like California and Oregon.
Curaleaf’s general and administrative expenses (excluding depreciation and amortization) decreased by $7.8 million (7% decrease) in the first quarter of 2024 compared to the first quarter of 2023, demonstrating strong cost control measures.
Although Curaleaf’s interest expenses increased significantly from $10 million in the first quarter of 2023 to $15.3 million in the first quarter of 2024, these interest expenses are expected to decrease in future quarters as a result of the company’s overall strategy to reduce debt and interest.
During the first quarter of 2024, Curaleaf generated $43 million in cash operations and used $13 million to pay down long-term debt. This is a record quarter for Curaleaf in terms of cash generation. For all of 2023, Curaleaf only generated $91.2 million in cash from operations. By 2024, Curaleaf should be able to generate over $100 million in cash from its operations, simply because it no longer has to pay 280E in taxes. This abundance of liquidity can help significantly reduce Curaleaf’s long-term debt.
Overall, Curaleaf is having a pretty positive quarter with its international segment leading the race.
Tax situation
Curaleaf will likely stop making quarterly income tax installment payments to the IRS beginning in the first quarter of 2024, now that the DEA has announced its decision to relist cannabis as Schedule III.
In total, Curaleaf paid income taxes of approximately $100 million in 2023. This $100 million will be saved in 2024.
However, it remains unclear whether Curaleaf has filed amended US tax returns to claim tax refunds similar to those of Trulieve.
International exhibition
One of the major international developments is the acquisition of Northern Green Canada. The acquisition was completed on April 19, 2024. Curaleaf is expected to pay $16 million in stock and an earn-out for this acquisition. The detailed purchase price, including the price supplement, will be disclosed in the second quarter of 2024.
The acquisition of Northern Green Canada is quite significant for Curaleaf.
In the past, Curaleaf International was not fully vertically integrated. Its international assets are mainly pharmacies, distributors, processors and wholesalers. Growing high-quality cannabis in the same way as in the United States is quite difficult in the international markets where Curaleaf operates due to lack of know-how and high labor and electricity costs, among other factors.
Canada is the only developed country to have fully legalized cannabis. After several years of fierce competition, several producers have emerged to be able to consistently produce high quality cannabis at a reasonable cost. Northern Green Canada is one of the few producers in Canada that is also EU-GMP certified, allowing it to export directly to international markets.
The acquisition of Northern Green Canada allows Curaleaf International to be truly vertically integrated, achieving the type of gross margin similar to its U.S. operations.
Although Curaleaf International may see its gross margin increase through this acquisition in order to achieve vertical integration in the coming years, it may not see a significant increase in revenue in the near term given that Northern Green Canada appears to be a key supplier to Curaleaf International alreadyand its revenues could simply be eliminated as intercompany transactions.
Assessment
The market capitalization of Curaleaf as of May 15, 2024 is $4.35 billion. Below is a quick valuation overview comparing Curaleaf to its peers.
It’s clear that while Curaleaf’s total revenue remains ahead among MSOs, Trulieve is catching up. If we exclude the revenue brought in by Curaleaf International (around $100 million for 2024), Curaleaf’s revenue from the United States is essentially the same as Trulieve’s.
Additionally, Trulieve has a relatively better capital structure and a clear tax strategy to take advantage of cannabis rescheduling compared to Curaleaf.
As a result, despite its potential in the international segment, Curaleaf’s valuation is relatively rich compared to its peers, especially since investors may be overconfident in the valuation of MSOs in general at present.
Conclusion
Since my previous analysis on March 11, 2024, the stock has demonstrated significant growth, outperforming the S&P 500 Index and its peers. However, despite positive performance in the first quarter of 2024, including notable international performance and strategic acquisitions, challenges persist, particularly in maintaining domestic market share. Given its relatively high valuation compared to its peers and lack of a clear tax strategy, I think it is fair to upgrade to a ‘Hold’ rating.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these actions.
