After Getting Smoked, is TLRY a Buy?

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Senate Democrats revealed the official Cannabis Administration and Opportunity Act in July. If passed, it would decriminalize cannabis on the federal level, paving the way for legalizing marijuana in the future. 

Unsurprisingly, interest in cannibas related names skyrocketed in the last month.

Top of this list is Tilray Brands (TLRY).

Cannabis stocks have gotten crushed over the last year, but if they can get some legal wins under their belt, sentiment can shift quickly. 

Tilray is no exception.

But with government gears starting to grind, does that leave an opportunity to ride this stock higher?

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Tilray’s Business 

Tilray Brands, Inc (TLRY) is a global leader in marijuana research, cultivation, processing, and distribution operating in Canada, the U.S., Europe, Australia, and Latin America. The company supports over 20 brands in over 20 countries, offering various cannabis products, hemp-based foods, and craft beverages. 

Management breaks the business in five segments—Cannabis Business, Distribution Business, Beverage Alcohol Business, Wellness Business, and Business Under Development. 

The beverage segment is one of the few segments operating in the United States. Otherwise, the vast majority of the company’s revenues come from sales in Canada and Europe.

During the fiscal year 2022, the company reported net revenue grew 22% to $628 million compared to the fiscal year 2021. TLRY saw a significant revenue increase from its Beverage Alcohol Business and Wellness Business, which represented 20% of the firm’s revenues compared to 7% in 2021.

Furthermore, management believes it will reach $70-$80 million of adjusted EBITDA and be free-cash flow positive in its operating business units in fiscal year 2023. 

Right now, Tilray’s cannabis business is virtually non-existent in the United States. Despite several states legalizing products at the state level, THC and cannabis remain illegal at the federal level.

Recent legislation hopes to effectively decriminalize the substance. However, although it received wide bipartisan support, it’s also received bipartisan opposition from unlikely locations including Senator Tester of Montana and President Biden.

Nonetheless, supports hope with a large majority of Americans supporting legalization, it’s only a matter of time before it becomes legal in the U.S.

Financials

One thing that attracts investors into a stock is revenue growth. And that’s something TLRY has been able to do rather impressively over the years. 

The firm has increased its revenue by 3.5x since the fiscal year 2019. Furthermore, it nearly tripled its gross profit during the same time frame. 

While its operating margin is negative, TLRY does have a positive profit margin of 6.75%

TLRY has total cash of $279 million and $732 million in total debt, boasting a market cap of $1.938 billion. The firm has a current ratio of 2.46x, which means it has ample liquidity to handle its short-term liabilities.

While the firm is currently operating at a negative cash flow, it does believe it will be positive in the fiscal year 2023.

That would be a significant achievement and a boon to share price.

Valuation 

Currently, TLRY holds a GAAP P/E of 33.96x. However, that misrepresents the real business, which is still unprofitable, hency the non-existent forward multiples.

However, the company holds an impressive price-to-sales numbers at 2.29x, which is significantly better than most healthcare stocks, as the median price-to-sales ratio is 4.76x

Growth

TLRY is growing revenues at an impressive clip, 31.84% (YoY). That is expected to cool off a bit but is impressive, as forward revenue growth is projected at 19.3%.

None of this assumes any major revenue growth in the U.S. markets.

Profitability

TLRY has a better gross profit margin than some of its competitors, CRON and CGC. And a better net income margin than JAZZ, CRON, and CGC. 

However, becoming cash flow positive remains a big step and challenge.

Opinion 7/10

Cannabis stocks have endured a beating over the last few years. And TLRY is no different. Shares are off significantly from their all-time high of $300.

However, the company has endured and is now in a position to benefit from government reform. The cannabis banking legislation is around the corner, and that could be the catalyst TLRY needs to get off the mat. 

Risk vs. reward: we like the stock here and believe it will excel over the next 12-24 months.