Analyst sees positive catalysts for cannabis firm The Parent Company

Analyst sees positive catalysts for cannabis firm The Parent Company
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TPCO Holding Corp (OTCMKTS:GRAMF), better known as The Parent Company, posted solid earnings results for the fourth quarter and full year earlier this week. However, its stock has been declining alongside other cannabis stocks, like Tilray Inc (NASDAQ:TLRY), Aurora Cannabis Inc (NYSE:ACB) and Canopy Growth Corp (NASDAQ:CGC).

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Q4 2020 hedge fund letters, conferences and more

The Parent Company releases earnings results

Canaccord Genuity analyst Bobby Burleson said The Parent Company came in ahead of revenue estimates but a little behind on adjusted EBITDA. It posted an adjusted EBITDA loss of $34.6 million, an improvement from the adjusted EBITDA loss of $61.3 million in 2019 but below Burleson's estimate of -$25 million. The Parent Company reported an adjusted EBITDA loss of $17.7 million for the fourth quarter, an increase from $12 million during the year-ago quarter and worse than his estimate of -$8.1 million.

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Burleson maintained his revenue estimates and trimmed his adjusted EBITDA numbers due to reduced margins. However, he expects sizable synergies to appear in the second half of this year. He sees The Parent Company as the best-positioned cannabis company in California due to its broad retail distribution reach, cash position and ability to consolidate the state's fragmented market.

Burleson sees a number of positive catalysts on the horizon, including cost rationalization, more acquisitions, new products and organic expansion efforts, probably during the current quarter. He maintains his Speculative Buy rating and $15 price target on the firm.

Momentum after latest acquisition

The analyst noted that the company's momentum continues after the completion of the acquisitions of Caliva, Left Coast Ventures and SISU Extraction. The combination established The Parent Company as the biggest vertically integrated cannabis firm in California by revenue.

By leveraging the omnichannel platform acquired through Caliva, The Parent Company plans to reach more than 75% of California consumers by the end of this year and almost 90% by the end of next year. Fourth-quarter revenues rose 40% year over year to $40.2 million, beating Burleson's estimate of $36.6 million. The Parent Company reported $188.7 million in revenue for the full year, a 76% increase from the year before and ahead of his estimate at $185 million.

Burleson believes the company's margin headwinds will ease by the second half of the year. The Parent Company was hit by higher-than-expected raw materials costs, which didn't see their usual seasonal decline until late February. The company also had to clear out discontinued brands, which should also restrain gross margins in the first half of the year. Thus, Burleson is cautious about the pace of margin expansion this year.

He expects organic expansion of The Parent Company's retail and delivery network and its aggressive acquisition strategy to drive strong growth on the top line and high levels of adjusted EBITDA. He also sees plenty of room for cost savings as the acquisitions are integrated.

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