HomeMarket NewsMicro Cap StocksThe Capital Intensity of Cannabis Compared to Other Industries

The Capital Intensity of Cannabis Compared to Other Industries

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This chart examines the level of capital investment required in the cannabis industry compared to four other industries that could potentially merge with cannabis companies once federal legalization occurs: Tobacco, Alcoholic Beverages, Pharmaceuticals, and Consumer Products.

The chart focuses on the cannabis group, consisting of nine MSOs with market capitalizations over $100M.  

Tobacco includes British American Tobacco (BTI), Altria (MO), Phillip Morris International (PM), and Japan Tobacco (JAPAF).

Alcoholic Beverages include ABEV, Brown-Forman (BF-B), Constellation Brands (STZ), Diageo (DEO), and Molson Coors (TAP).

Pharmaceuticals include Johnson & Johnson (JNJ), Pfizer (PFE), Merck & CO. (MRK), and Eli Lilly (LLY).

Consumer Products include Colgate Palmolive (CL), Mondelez (MDLZ), Proctor & Gamble (PG), and Unilever (UL).

The capital intensity of each group (represented by the green bar) is determined by dividing their aggregate next twelve-month revenue estimates by their aggregate capital employed (book equity + total debt – cash). The lower the bar, the greater the capital required to generate $1 in sales.

The chart demonstrates that the cannabis industry is the most capital-intensive among the industries presented.

According to a study by NYU professor Aswath Damodaran, which analyzes approximately 7,000 companies in 94 industries, only 16 of those industries are more capital-intensive than cannabis. (Damodaran does not include cannabis in his research.)

The capital intensity of cannabis is influenced by its federal illegality. Cannabis companies are required to grow cannabis in each state where they sell their products, which is an economically inefficient practice. After legalization, it is expected that a more centralized or regionalized structure will develop. Similarly, cannabis companies currently have to maintain duplicate managerial and operational functions, which could be eliminated in an interstate commerce environment.

Similar to 280e, excessive capital intensity poses an economic burden on the cannabis industry, which we anticipate will improve the economics and cash flow of cannabis businesses in the future.

 

The Viridian Capital Chart of the Week highlights important trends in investment, valuation, and mergers and acquisitions sourced from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker offers market intelligence that assists cannabis companies, investors, and acquirers in making informed decisions regarding capital allocation and M&A strategy. This proprietary information service monitors capital raises and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week, the Tracker collects and analyzes all closed deals and categorizes them based on key metrics:

  • Deals by Industry Sector (Tracking capital flow and M&A deals across 12 sectors, from Cultivation to Brands to Software)

  • Deal Structure (Equity/Debt for capital raises, Cash/Stock/Earnout for M&A) and company status (Public vs. Private)

  • Principals involved in the Transaction (Issuer/Investor/Lender/Acquirer) and key deal terms (Pricing and Valuation)

  • Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

  • Deals by Location of Issuer/Buyer/Seller (Tracking capital flow and M&A Deals by State and Country)

  • Credit Ratings (Leverage and Liquidity Ratios)

Since its establishment in 2015, the Viridian Cannabis Deal Tracker has monitored and analyzed over 2,500 capital raises and 1,000 M&A transactions, with a total value exceeding $50 billion.

The preceding article is contributed by one of our external authors and does not represent the opinion of Benzinga. It has not been edited.

Source: Benzinga.com

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