On Friday, Cantor Fitzgerald analyst Pablo Zuanic said Canadian cannabis penny stock Auxly Cannabis Group Inc (OTCQX: CBWTF) is “arguably the best value” among Canadian legal producers.
The Auxly Analyst: Zuanic has an Outperform rating and 69-cent price target for Auxly, representing more than 100% upside from its current level of around 30 cents.
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The Auxly Thesis: Auxly is now the fifth-largest Canadian LP in terms of domestic recreational sales, accounting for about 4% market share in the fourth quarter of 2020.
Hifyre data suggests Auxly’s retail sales dropped about 10% in the first quarter of 2021 in what was a difficult quarter for the Canadian market as a whole.
Vapes represent about 71% of Auxly’s sales, and Zuanic estimates the company holds about 21% market share in the segment. Flower sales accounts for another 12% of Auxly’s business.
The company’s management has suggested Auxly will reach break-even EBITDA by the end of 2021.
“In our view, fundamentals are not reflected in the valuation (1.5x CY22E sales vs. 6-16x for the four larger LPs (based on our estimates), nor is the optionality from Imperial Tobacco (MB.LON/nc) owning convertible debt that could give it a 19.9% stake in the company,” Zuanic said.
The analyst said he anticipates Auxly will list on a U.S. exchange at some point, which should be a bullish catalyst for the stock.
He also said Auxly has relatively low execution risk compared to other mid-sized Canadian cannabis companies given its strong 2020 numbers, including 45% sequential growth in the fourth quarter.
Benzinga’s Take: Cannabis stocks will likely continue to be volatile in the near term while the industry matures. Long-term investors should monitor the progress of U.S. state-by-state and federal legalization efforts and should consider diversifying into several different U.S. and Canadian names rather than putting all their cannabis eggs in one basket.
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