Tilray (TLRY) is a U.S.-registered Canadian cannabis and pharmaceutical company with operations spanning across the globe. I’m bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
ESG Concerns
J.P. Morgan announced last week that they wouldn’t be allowing their prime broker clients to buy U.S.-related cannabis stocks. The decision to ban sales was made based on the anti-trust money laundering act, which places focus on the fact that although many states have legalized its use, the substance remains illegal under U.S. federal law.
ESG is a major focus among big banks globally. An event such as this could lead to other institutions altering their outlook on “pot stock” trading.
Key Drivers
Tilray being a cannabis investment company rather than an operating firm means it can build up a significant amount of cross-holding synergies as time passes. Cost-saving from synergies in Q1 amounted to $55 million on a run-rate basis with actual cash flow savings of $20 million.
Tilray also remains on track to save $80 million in synergies after Aphria merged under the Tilray name.
The global cannabis market is anticipated to grow by a CAGR of 26.7% up to 2028, which provides systemic support to Tilray. The fact that Tilray is already a dominant firm in such a high-growth market means that it’s placed itself well to have significant pricing power in the years to come.
The firm’s balance sheet remains strong with only 13% in leverage and nearly $4 billion in asset growth since the turn of the year. If Tilray continues adding companies to its balance sheet while keeping its leverage low, we’re likely to see a very valuable company.
Valuation
Tilray can be considered a special purpose vehicle seeing as it’s a private equity firm that raised its capital through the public markets. It’s thus surprising that the firm only has 463.34 million shares outstanding, especially if one considers its low debt to equity ratio (13.1%). These data points, combined with an anticipated one-year forward EBITDA growth rate of 115.6%, convey that value is on the up for Tilray stock.
Wall Street’s Take
Turning to Wall Street, Tilray has a Hold consensus rating, based on two Buys and 10 Holds assigned in the past three months. The average Tilray price target of $14.03 implies 15.6% upside potential.
Concluding Thoughts
Tilray is facing ESG headwinds, however, the cannabis sector has shown time and time again that legislative issues won’t stand in the way of its long-term growth. Tilray’s growth remains robust, mainly because of successful synergies. However, a reduced debt load and a build-up of assets could drive value moving forward.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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