When Will Canadian Marijuana Stocks Be Profitable?

Marijuana should be one of fastest-growing industries in North America this decade. There are currently tens of billions of dollars in cannabis sales conducted annually in the black market. If these sales can gradually be moved to legal channels via legalization, large-scale players should see plenty of profit potential.

However…

our neighbor to north has completely face-planted in its attempt to be a global marijuana leader.

Canada’s pot industry has been a mess

Despite becoming the first industrialized country to legalize recreational cannabis, Canada and its more than a half-dozen well-known licensed producers have struggled mightily.

Part of this blame can be attached to national and provincial regulators. For example, Health Canada delayed the initial launch of high-margin derivatives (e.g., edibles, infused beverages, and vapes) in 2019 by two months, and took far too long to review and approve cultivation and sales license applications prior to the Oct. 17, 2018 launch of dried flower sales throughout Canada.

As for provincial regulators, select provinces have suffered from failed leadership. In Ontario, the country’s most-populous province, regulators stuck with a lottery system to assign retail licenses between Oct. 2018 and Dec. 2019. At the one-year anniversary (Oct. 17, 2019) of recreational sales, only 24 dispensaries had been opened in a province that could comfortably house close to 1,000 retail locations. Although Ontario has since moved to a more traditional application vetting process for dispensaries, it’s going to take a while before there’s an adequate retail presence in the province.

Canadian licensed producers (LPs) are to blame, too. Most of them failed to accurately predict what domestic consumer demand would be like in the early going, and are now being forced to shutter cultivation facilities and take significant writedowns on acquisitions.

At some point, the Canadian marijuana industry is going to get its act together. The $64,000 question is, “When will Canadian marijuana stocks be profitable?”

According to Wall Street’s consensus estimates, investors are going to need to be patient.

The lone Canadian LP expected to be profitable by 2022

The earliest LP on track to be profitable on a full-year basis is Ontario’s Aphria (NASDAQ:APHA). Wall Street believes Aphria can generate $0.08 Canadian in per-share profit in fiscal 2022 (the company’s fiscal year ends in May).

However, before anointing Aphria as the clear Canadian cannabis leader, understand that the company’s operating results are getting some serious help from its acquisition of pharmaceutical distribution business CC Pharma. In fiscal 2020, total sales hit CA$543.3 million, which was up 129% from the prior-year period. But of this CA$543.3 million, only CA$150.4 million was associated with cannabis.

Generally speaking, pharmaceutical distribution margins are small and unimpressive. But distribution is a volume-based business that’s clearly helping to push Aphria toward recurring profitability. To be clear, I’m not saying investors should punish Aphria for having a successful ancillary business segment. Rather, just understand that pharmaceutical distribution is going to be a drag on the company’s margins, and value the company accordingly.

This quartet of LPs should be profitable by 2023 (if they survive)

For four well-known Canadian LPs, 2023 looks to be their first opportunity to push into the green. Wall Street projects that Cronos GroupTilray (NASDAQ:TLRY)HEXO (NYSE:HEXO), and OrganiGram (NASDAQ:OGI) will all turn nominally profitable on a recurring basis in 2023.

Of this group, OrganiGram looks the most compelling. OrganiGram didn’t make any overpriced acquisitions leading up to the legalization of weed in Canada, and it has just a single operational facility in Moncton, New Brunswick. If the company can effectively control its expenses and produce superior yields to the industry average, it could easily come out a long-term winner. Investors will, however, need to exercise patience with OrganiGram as it ramps up its higher-margin derivative sales.

On the other hand, it’s not even clear that…

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