Marijuana stocks continued to rally Wednesday after recent IPO Tilray (TLRY) said it's developing an array of brands to be prepared for legalization in the U.S. and elsewhere, and predicted that cannabis will be incorporated in more products while displacing others.
XThe remarks followed Tilray's first quarterly report as a public company, showing a 95% jump in Q2 sales to $9.7 million, topping estimates for $9 million. Losses, however, widened amid an expansion drive and plans for a massive increase in production capacity.
"We're building a global portfolio of brands and products with the goal of making those brands industry leaders in every market where cannabis is legal — in Canada, in Germany, Australia and the United Kingdom," CEO Brendan Kennedy told analysts late Tuesday. "I think that we're a lot closer to federal legalization in the U.S. than most people realize. Whenever it happens, Tilray will be ready."
However, even as Tilray sounded optimistic on U.S. legalization, BuzzFeed News reported Wednesday that the White House has "secretly amassed a committee of federal agencies from across the government to combat public support for marijuana and cast state legalization measures in a negative light."
The report adds to the conflicting signals emerging from the administration on marijuana. In January, Attorney General Jeff Sessions rescinded Obama administration guidance that led the government to take a laissez-faire approach to states that loosened their marijuana restrictions. Then in June, President Trump said he would "probably" back legislation that would keep the federal government from interfering with states' marijuana policies.
Marijuana Stocks Eye EU Growth
During Tuesday's call, Tilray management also said it expected "almost every country" in the European Union to legalize medical marijuana over the next few years.
As more legal barriers fall across the world, the company sees having 912,000 square feet of production space by the end of the year, as production facilities come online. That's a 15-fold increase. The company during Q2 saw a nearly 10-fold increase in its cash and cash equivalents — to $25.3 billion.
Kennedy also said the pharmaceutical industry was recognizing that cannabis was threatening to replace opioids.
The food and beverage industry, he said, was showing more interest in water containing cannabidiol, a non-psychoactive component in cannabis. Consumer staples companies, he said, were in "desperate search of growth."
"We are witnessing a global paradigm shift in the transformation of a $150 billion illicit market into an increasingly professionalized, legalized, regulated and taxed industry," Kennedy said during Tuesday's call.
Marijuana Stocks Jump
Tilray stock jumped 20.6% to 62.13in the stock market today, Canopy Growth picked up 7.4%, and Cronos Group (CRON) leapt 15%.
The dash higher follows what has been a good two weeks for marijuana stocks. Nova Scotia Liquor chose a Tilray subsidiary to receive an "initial purchase order" for recreational pot. That will let Tilray supply the province of Nova Scotia with recreational marijuana products.
Nova Scotia Liquor, which oversees alcohol sales and distribution in that province, chose a total of 14 pot companies. Legalization of recreational marijuana takes hold on Oct. 17 in Canada. Tilray has signed deals to supply consumers in seven Canadian provinces and territories, the company said on the call.
'A Slower Transition'
Still, as with U.S. states like California, the rate at which the legal market absorbs the illicit market might take longer than the marijuana industry wants. In Canada, the province of Ontario — the nation's most populous — said it would begin recreational sales on Oct. 17 by rolling out a government-run website. Privately-run cannabis retailers will arrive in April.
"We do expect the change in Ontario to a private retail model will result in increased revenue opportunities over the longer term," Tilray CFO Mark Castaneda said during the call. He added that he expected "a slower transition of the illicit market in the near term, as online sales will be the only option in Ontario until the second quarter of 2019."
What's more, as the company prepares for recreational legalization, its margins and revenue per unit could be under pressure as the company sells more marijuana via wholesale, as opposed to directly to consumers.
The average price per gram rose to $6.38 during the second quarter, up from $6.20 a year ago. The price bump was a result of selling more potent product, management said, as well as extracts. Oils comprised around 46% of Q2 sales, Tilray said during the call. Dry cannabis — that is, buds or "flower" — made up around 54%.
With only weeks to go before recreational marijuana sales take hold in Canada, management said that the landscape there would look a lot like Washington or Colorado. In those states, the company said, alternative cannabis products — as opposed to dry cannabis itself — have become more popular.
The company reported a Q2 loss of 17 cents per share. That was greater than Zacks estimates for a loss of nine cents per share. A year ago, the company's per-share loss was one cent. Tilray's Q2 net loss overall was $12.8 million during the quarter, compared to $2.4 million a year ago.
Alcohol, Marijuana Industry Players Join Forces
Tilray in July became the first pure-play marijuana company to have an IPO on a major U.S. exchange. The debut raised $163.6 million in net proceeds, the company said, which will help it pay for more cultivation and processing space, repay debt and potentially make more acquisitions.
Then, Molson Coors' (TAP) Canadian business agreed to form a joint venture to look at making cannabis drinks. And Constellation Brands (STZ) said it would invest nearly $4 billion in Canadian marijuana producer Canopy Growth (CGC).
Meanwhile, Tilray's controlling stake holder, Privateer Holdings, has a portfolio that also includes Leafly, a marijuana information website that functions as a Yelp for weed. It also owns Marley Natural, described as the "official cannabis brand of Bob Marley."
Cowen analyst Vivien Azer, in a research note this month, said Tilray could benefit from Leafly's encyclopedic data on strains and consumer trends.
Tilray, Canopy and Cronos surged last week following a Bloomberg report that Diageo (DEO), the maker of Johnnie Walker Scotch whisky, was in talks with at least three pot producers over a possible collaboration. Diageo is said to be weighing whether to make cannabis beverages.
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The post Marijuana IPO Tilray: U.S. Is Closer To Legalization Than You Think appeared first on Investor's Business Daily.
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