Potential Boost for Multi-state Cannabis Operators

According to Alliance Global Partners analyst Aaron Grey, multi-state cannabis operators, Curalef Holdings Inc., Trulieve Cannabis Corp., and Verano Holdings Corp., could experience significant growth if cannabis is reclassified from a Schedule I drug to a Schedule III drug in the United States.

Currently, cannabis is classified as Schedule I, along with substances like LSD and heroin, which means it is deemed to have no medical benefits under federal law. However, the Drug Enforcement Administration is considering a recommendation from the U.S. Department of Health and Human Services (HHS) to lower the classification of cannabis to Schedule III. This classification acknowledges the medical applications of the drug and typically requires regulation by the Food and Drug Administration.

A decision on the reclassification is anticipated by the end of 2024. The HHS had already recommended in August that cannabis should be reclassified as Schedule III, which prompted a surge in cannabis stocks when a 250-page document detailing the findings of the recommendation was released.

Lowering cannabis to Schedule III would have significant implications for state-legal marijuana companies. One major benefit would be the removal of the 280E tax law, which was established during the Drug Wars of the 1980s. This law currently prevents cannabis companies from claiming standard business-tax exemptions for expenses like cost of goods sold and other major deductions. As a result, it significantly increases operating costs for the sector.

Analyst Aaron Grey estimates that if the 280E ban on tax deductions is lifted, Curaleaf could benefit the most, with an estimated gain of $130 million to $155 million. Trulieve could see a boost of $115 million to $135 million, while Verano might experience an increase of $90 million to $110 million.

Cannabis Stocks Could See Valuation Gap Narrow if Pot Rescheduled to Schedule III

According to analysts at Jefferies, the potential rescheduling of marijuana to Schedule III could bring significant cash flow benefits to cannabis companies. Grey, a cannabis analyst, projected a benefit of $50 million to $70 million for Cresco Labs Inc., $55 million to $70 million for Green Thumb Industries Inc., and $35 million to $50 million for Cannabist Co. Holdings Inc. Furthermore, Grey mentioned that this move could be used to de-risk balance sheets, capital expenditures, or facilitate mergers and acquisitions.

The largest U.S. cannabis companies currently trade at a discount of about 45% compared to high-growth retail consumer packaged goods companies. However, if the 280E tax code amendment is eliminated, it could potentially narrow this valuation gap.

Nadine Sarwat, a cannabis analyst with Bernstein, expressed uncertainty regarding the potential move to lower the classification of marijuana to Schedule III. Although rescheduling would be significant, Sarwat noted that many cannabis producers and investors would prefer full de-scheduling and a commercial model similar to alcohol.

On the other hand, Sarwat mentioned that the Canadian cannabis market is improving for operators. Volume has increased by 16% year-over-year, and even though pricing has slightly decreased by 5%, it is gradually getting better. The demand for legal cannabis products is rising due to a shift from illegal spending to legal products and the entrance of new consumers into the sector.

Bernstein adjusted price targets for several companies in the industry. They raised the target for Canopy Growth Corp. to $5 from $1.10 and lowered the target for Tilray Brands Inc. to $2.20 from $2.90 per share. Market-perform ratings were reiterated for both companies. Additionally, a market-perform rating was given to Cronos Group Inc., along with a price target of $2.10 per share.

Also read: MedMen goes from height of $3 billion valuation to zero as stock draws cease-trade order and top execs leave