What Canada’s Legalization Delay Means For Marijuana Stocks

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Earlier this month, Canadian public safety minister, Ralph Goodale, said that the country’s efforts to legalize recreational use of marijuana were “on track and on time.” Those words turned out to be off track and poorly timed.

Late last week, the Canadian government acknowledged that its citizens won’t be able to legally purchase marijuana for recreational use until at least one month later than originally expected. Canadian marijuana stocks immediately dropped on the news. But what is the actual impact of the legalization delay on these stocks?

The bad news

July 2018 was supposed to be the month for Canadians to be allowed to legally buy recreational marijuana. On Feb. 15, though, health minister Ginette Petitpas Taylor stated that the original target date wasn’t realistic. The problem isn’t at the national level, but instead at the provincial level.

The Canadian Senate is on track to vote on the bill to authorize legal use of recreational marijuana by June 7, 2018. It appears the votes are there for approval of the bill. Following the assumed passage of the legislation, a royal assent is likely to be quickly given.

However, Petitpas Taylor said Canada’s provinces and territories will need from eight to 12 weeks to get ready for retail sales of marijuana. This means Canadians won’t be able to buy recreational marijuana until early August, or possibly even early September. And Petitpas Taylor stated that all provinces and territories will begin allowing sale of legal marijuana at the same time, which means just one laggard could delay the entire country.

It’s not surprising at all that the stocks of major Canadian marijuana growers sank on this news. Canopy Growth stock fell nearly 6% on the news of a delay. Aurora Cannabis and Aphria slipped 7%, while MedReleaf stock dropped 8%.

Estimates for the Canadian recreational marijuana market have ranged from $4.2 billion to as much as $12 billion annually. At the low end of the range, a one-month delay could mean $350 million in lost sales for the country’s marijuana industry. A worst-case scenario, using the highest projected market size and a lengthier delay, would translate to lost revenue of around $2 billion.

To understand just how serious the delay is, just look at the revenue for the big four marijuana growers over the last 12 months. Combined, Canopy Growth, Aurora, Aphria, and MedReleaf made less than $150 million during the last 12 months. An optimistic cost of the delay reflects more than double the revenue these companies generated during the period.

The good news

There is good news for Canadian marijuana growers, though. Most important, the delay appears to be only a speed bump, not a roadblock. While there are some in the country’s legislative chambers that oppose legalization of recreational marijuana, Prime Minister Justin Trudeau still should have all of the votes needed to fulfill his campaign promise to legalize the drug.

And while they would have preferred that sales for recreational marijuana begin in July, marijuana growers now have more time to finalize retail operations. The major players in the Canadian cannabis industry have been frantically building out their retail capabilities and adding production capacity to serve what is anticipated to be strong demand for recreational marijuana.

Aurora Cannabis, for example, bought a 19.9% stake in Liquor Stores N.A. Ltd., which operates 231 retail liquors stores in Canada. As part of the deal, Liquor Stores N.A. Ltd. will convert some liquor stores to cannabis retail stores that will sell Aurora’s products for the recreational marijuana market.

Canopy Growth has been busy lining up retail and supply agreements with provinces that have already established their frameworks for moving forward with legalized recreational marijuana. The company recently announced that it had won a bid to operate retail stores in Manitoba. This was Canopy’s second provincial retail agreement, with a previous deal announced with Newfoundland & Labrador.

Like Aurora and Canopy, Aphria and MedReleaf have inked agreements to supply Quebec with marijuana for the retail market. MedReleaf also recently introduced its first recreational marijuana brand, San Rafael ’71.

Buy on the dip?

Perhaps the best news for investors wanting to buy marijuana stocks is that Canada’s delay in legalizing recreational marijuana made the stocks less expensive. Are these stocks candidates to buy on the dip? I think so.

Nothing has changed with the longer-term prospects for marijuana growers. The Canadian recreational marijuana market won’t be any smaller because of a delay. Opportunities for the companies in international markets for medical marijuana, especially Germany, remain strong.

Of course, just because these stocks are less expensive than they were doesn’t mean they’re cheap. All of the marijuana stocks mentioned trade at steep sales multiples.

But remember, those valuation multiples are based on limited sales from the past. If the recreational marijuana market in Canada and the international medical marijuana markets are as big as many expect them to be, Canopy Growth, Aurora Cannabis, Aphria, and MedReleaf stocks should all move significantly higher. The latest bad news should be ancient history by the end of the summer.