New Product Lines And Retail Expansion Will Strengthen Future Outlook

Key Takeaways

• Strategic focus on growth markets and operational efficiency could enhance revenue and reduce costs, improving overall profitability.
  
• Expansion and innovative products aim to dominate fast-growing categories, increasing market share and driving revenue growth.
  
• Increased competition, impairments, and regulatory uncertainties challenge Verano Holdings' revenue growth, profitability, and market share stability, with future earnings at risk.

Catalysts

Operates as a vertically integrated multi-state cannabis operator in the United States.

• Verano is strategically optimizing its footprint by focusing on markets primed for growth, such as Florida and Virginia, and plans to streamline operations, potentially improving revenue growth and reducing costs.
  
• The company launched several innovative new product lines and aims to dominate fast-growing categories, which could enhance revenue and market share.
  
• Operational efficiencies, such as increased automation and SKU rationalization, are planned to manage production costs, potentially improving net margins.
  
• Verano is expanding its retail footprint with planned new dispensaries, expecting to drive revenue growth through increased market presence.
  
• The potential for legislative changes, such as the decoupling of 280E tax in certain states like Pennsylvania, may offer substantial future tax savings, impacting net earnings positively.

Verano Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Verano Holdings's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts are not forecasting that Verano Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Verano Holdings's profit margin will increase from -38.9% to the average CA Pharmaceuticals industry of 1.1% in 3 years.
• If Verano Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $9.4 million (and earnings per share of $0.02) by about May 2028, up from $-341.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 218.2x on those 2028 earnings, up from -0.9x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 4.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Verano Holdings Future Earnings Per Share Growth

Risks

• Verano Holdings experienced a decrease in revenue for the full year 2024, largely driven by expected declines in key markets like New Jersey and Illinois due to increased competition and pricing pressures. This poses a risk to future revenue growth.
  
• The company reported a net loss for the year of $342 million, which included significant impairments of intangible and fixed assets, impacting Pennsylvania retail licenses and an Arizona cultivation facility. Such impairments can negatively affect future earnings and valuation.
  
• Gross profit for the fourth quarter decreased, alongside an increase in SG&A expenses as a percentage of revenue due to new store openings. This suggests a potential tightening of margins, which could further impact net margins and overall profitability.
  
• With ongoing pricing pressures particularly in competitive markets such as Florida, Verano's ability to maintain or grow its market share without sacrificing margins may be challenged, affecting earnings stability.
  
• The discontinuation of state-level revenue breakouts and uncertainties around Section 280E tax provisions create a lack of transparency and potential regulatory burdens, creating risks for income tax expenses and long-term financial outlook.

Valuation

• The analysts have a consensus price target of CA$5.649 for Verano Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$8.98, and the most bearish reporting a price target of just CA$3.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $894.8 million, earnings will come to $9.4 million, and it would be trading on a PE ratio of 218.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$1.15, the analyst price target of CA$5.65 is 79.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.