Better Cannabis Buy: Curaleaf vs. Harvest Health & Recreation

The Biden administration is expected to mark a new era for the cannabis industry, given the new  president’s affirmative stance on legalization of marijuana. With the Democratic party now controlling the U.S. Senate and House of Representatives, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which was introduced last July, is expected to be passed, legalizing the medical and recreational use of cannabis nationwide.

According to a survey conducted by Gallup, approximately 68% of Americans support the legalization of cannabis. With many states already taking action to decriminalize recreational marijuana consumption, many companies, which have operated primarily as medical marijuana suppliers, are entering the recreational consumption segment, thereby expanding their operations nationwide. Canadian cannabis companies Curaleaf Holdings, Inc. (CURLF) and Harvest Health and Recreation Inc. (HRVSF) are taking steps to expand their foothold in the United States in response to the anticipated legal changes.

Both stocks have generated decent returns over the past year. While CURLF gained 104.5% over this period, HRVSF returned 7.5%. In terms of 6-month performance, however, HRVSF is the clear winner with 234.1% gains versus CURLF’s 64.7% returns. Moreover, HRVSF has gained 45.4% year-to-date, beating CURLF’s 10.3% returns over this period.

But which stock is a better buy now? Let’s find out.

Latest Developments

On January 23, CURLF began supplying cannabis for recreational consumption across eight dispensaries in Arizona. With most states across the country decriminalizing marijuana, CURLF’s regulated sale of the product for adult use has allowed the company to capitalize on the changing trends.

On January 12, CURLF raised approximately C$316.88 million  an offering of 18.98 million shares. The financing is  a major milestone of the company because it is the largest post-reverse-takeover  offering in the industry. The proceeds of this offering should allow the company to fund its working capital and general corporate expenses. In the same month, CURLF secured a $50 million revolving credit facility, strengthening its balance sheet. These funds should allow the company to expand its business operations within the country and overseas.

HRVSF sold an industrial property for $23.8 million this month . The company used the proceeds from this transaction to enter a triple net lease deal with Innovative Industrial Properties, Inc. This should allow HRVSF to increase its total supply in Florida, which is one of the core operational markets for the company.

Just two days prior to this, HRVSF reported its first sale of legal recreational cannabis in Arizona, marking the onset of a new avenue of business operations. Prior to this, the company mainly operated as a medical distributor.

Recent Financial Results

CURLF’s revenues have increased 195% year-over-year to $182.41 million in the third quarter ended September 30, 2020. This can be attributed to a 164% rise in managed revenues. Its gross profit on cannabis sales have improved 280% from the year-ago value to $89.67 million, while its adjusted EBITDA has risen 305% from the prior-year quarter to $42.30 million.

In comparison, HRVSF’s revenues have increased 86% year-over-year to $61.60 million in the third quarter ended September 30, 2020. Its Gross profit, excluding biological adjustments, have grown 147.4% from the year-ago value to $28.70 million, while its adjusted EBITDA (excluding biological adjustments) has improved 196.3% from the same period last year to $10.50 million.

Past and Expected Financial Performance

CURLF’S revenue has increased 165.8% year-over-year, while HRVSF’s revenue rose 107.8% over the same period. Moreover, CURLF’s EBITDA has grown 1321.3% from the year-ago value, while HRVSF’s EBITDA declined.

Analysts expect CURLF’s EPS to rise 16.7% in fiscal 2020. The company’s revenue is expected to increase 187.5% versus the past year, and 98.7% in fiscal 2021.

Analysts expect HRVSF’S EPS to rise 77% in fiscal 2020. A consensus revenue estimate indicates a 95.6% rise over the past year, and 62% improvement in the current year.

Thus, CURLF has a higher growth potential.

Profitability

CURLF’s trailing 12-month revenue is 2.37 times HRVSF’s CURLF is also more profitable, with a gross margin of 65.8% compared to HRVSF’S 51.3%.

CURLF’s ROE and ROA of 3.1% and 3.7%, respectively, compare favorably with HRVY’s negative values.

Valuation

In terms of three-year non-GAAP P/E, CURLF is currently trading at 59.56x, 90% more expensive than HRVSF, which is currently trading at 31.34x. CURLF is also more expensive in terms of trailing 12-month price/sales (14.93x vs 5.22x) and trailing 12-month EV/Sales (20.19x vs 5.16x).

Moreover, CURLF’s trailing 12-month price/book ratio of 6.27 is 296.8% more expensive than HRVSF’s 1.58.

Though CURLF is relatively more expensive compared to HRVSF, its premium valuation is justified given the former’s higher earnings growth potential.

POWR Ratings

Both CURLF and HRVSF are rated Buy in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for each of these stocks:

CURLF has an A for Trade Grade and Industry Rank, B for Peer Grade, and C for Buy & Hold Grade. It is currently ranked #85 of 243 stocks in the Medical – Pharmaceuticals industry.

HRVSF also has an A for Trade Grade and Industry Rank, B for Peer Grade, and C for Buy & Hold Grade. It is currently ranked #76 in the same industry.

The Winner

With most Americans supporting the use of marijuana for recreational as well as medical purposes, both CURALF and HRVSF have significant growth potential. In fact, both companies are taking steps to secure first-over advantage by supplying legal recreational cannabis in certain states. However, CURLF’s widespread market presence has allowed the company to generate  relatively higher revenues and thereby remain more profitable. CURLF’s higher growth potential justifies the premium valuation of the stock, making it the better buy here.

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CURLF shares rose $1.01 (+7.59%) in after-hours trading Friday. Year-to-date, CURLF has gained 11.10%, versus a -1.02% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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