Is Emerald Health A Buy? [Seed-to-Sale Cannabis]

Is Emerald Health Therapeutics A Buy?: The US has been inching towards full legalization of marijuana for decades, starting with California’s legalization of medical marijuana in 1996.

In subsequent years, many more states followed suit. Some have now legalized recreational use of marijuana, as well. However, there is a clash between state laws and federal laws, which continue to classify marijuana as a Schedule I controlled substance – equivalent to heroin, and more dangerous than Schedule II drugs like oxycodone, cocaine, fentanyl, and methamphetamine.

There are indications that marijuana may come off of the US Schedule I list in the not-so-distant future, as more than 65 percent of Americans now support full legalization of cannabis. This figure is higher than ever before, even among the most conservative groups.

Perhaps some of the change in national mood has to do with the stunning profitability of recreational marijuana in states like Colorado. Perhaps it has to do with the success of northern neighbor Canada’s decision to legalize marijuana nation-wide. Either way, it is clear that change is coming, and marijuana will be one of the fastest growing industries in the world.

Many investors are anxious to be a part of what promises to be a massive market triumph, but choosing the best way to enter this market is a challenge. There are hundreds of cannabis stocks – many of them trading outside of major exchanges – and they cover businesses doing everything from growing plants to developing targeted medical therapies. One that has made headlines from time to time is Emerald Health Therapeutics, thanks to its laser-focus on pharmaceutical innovation. But is Emerald Health Therapeutics a buy?

What Does Emerald Health Therapeutics Do?

Emerald Health Therapeutics is focused on the health and wellness potential of cannabis products. Through a series of strategic partnerships, it has developed a vertically integrated company that does everything from growing cannabis plants to selling finished product to end users.

In the industry, such a company is referred to as a “seed-to-sale enterprise”. Emerald Health Therapeutics has ownership interests in a number of outdoor growing facilities, and it operates Verdélite – a premium indoor cannabis production center.

The company has more than a decade of experience in designing products that fall into nutraceutical, botanical, and pharmaceutical categories for the express purpose of enhancing health and wellness. Its cannabis line relies on evidence-based techniques to ensure positive interaction with the body’s natural endocannabinoid system.

Emerald Health Therapeutics has qualified as a Licensed Producer under Canada’s Cannabis Act, and it has prepared extensively for Cannabis 2.0 – the next step in Canada’s expanding cannabis market. Effective October 17, 2019, producers can begin producing and selling cannabis derivatives, which include marijuana-infused products like edibles, beverages, and vapes.

Partnerships

Examples of Emerald’s partnerships and joint ventures include 50 percent ownership of Pure Sunfarms, which generated $32 million in sales for the second quarter of 2019.

Emerald has executed agreements with ten Canadian provinces for distribution of recreational marijuana, and it has partnered with Factors R&D Technology to increase the scale of production.

Emerald Naturals is already distributed through more than 250 grocery, pharmacy, and health food channels, and with the increased production capabilities, that figure is expected to reach 1000 distribution locations by the end of 2019.

Emerald Health Revenue Growth & EBITDA

Second quarter financial results were mixed for Emerald Health Therapeutics. On one hand, sales totaled $5.1 million, which was an increase of 94 percent over the first quarter and 348 percent over fourth quarter 2018.

On the other hand, the company is still operating at a loss – though that loss is improving. The second quarter’s net loss totaled $0.5 million, which is significantly better than first quarter’s $3.7 million loss. Adjusted EBITDA came in at $1.9 million, which represents an increase of $5.4 million over first quarter results.

The Pure Sunfarms joint venture was a major component of Emerald Health Therapeutic’s second quarter success. The company’s share of Pure Sunfarm’s income was $14.5 million – a substantial improvement over first quarter’s $5.8 million. Overall, the net loss per common share came in at $0.003, which shows gains when compared to first quarter losses of $0.043 per share.

Emerald Health Therapeutics spent its second quarter growing Pure Sunfarm’s capabilities. It also focused on scaling up THC and CBD extraction capabilities, along with product manufacturing capabilities, in preparation for Cannabis 2.0.

Management indicated their firm belief that the company is well-positioned to thrive in the rapidly expanding cannabis industry, and they projected profitability in coming quarters.  

Is Emerald Health Stock a Buy?

Most analysts aren’t quite ready to throw their support behind Emerald Health Therapeutics, in part because stock prices are down more than 40 percent year-to-date. For the moment, the company’s primary asset is its 50 percent ownership stake in Pure Sunfarms.

A full 86 percent of Emerald Health Therapeutics’ total second quarter revenue came from Pure Sunfarms, and many believe that Emerald will grow more dependent on this relationship – not less.

Today, Pure Sunfarms has the capacity to produce 75,000 kilograms of cannabis, but there is a second facility in the works. Once complete, this facility will double Pure Sunfarms’ capacity, and business leaders expect to see the increased production by 2021.

When it comes to adding Emerald to stock portfolios, the general consensus is to give it a bit more time. The company is working to develop its presence in the US and Canadian hemp CBD markets, and it is expanding its cannabis-free Endo line of heath supplements.

The success of these projects – and the continued success of Pure Sunfarms – will play a significant role in Emerald’s long-term profitability. With shares trading under a dollar for now, there is time to monitor results before making the decision to invest.