Thoughts on LABS.TO and the extraction side of cannabis

Hi Dan & Mat, I’m curious on your thoughts on LABS (MediPharm Labs). I’ve generally lost all faith in cannabis stocks and feel like it’ll be years before we know if the market is as good as it was once thought it could be. However, MediPharm with their extraction model (opposed to farming the plant) does seem to be a more promising company to me. Extraction lends itself to so many more possibilities for both recreational and medicinal and they also offer white label opening up their products to so much more.

They’ve taken a huge hit recently on the stock price with no obvious answer to me but manipulation but they seem to be securing deals all over the world, have good management and look to be top dog in what is only a handful of competitors in the cannabis extraction space which makes me think it could have huge potential.

All the attention has been on the typical growers like Canopy, Hexo & Aphria but could MediPharm, Valens etc be the real future of the cannabis industry?

I know its still ultimately speculative being a somewhat new industry but out of all the cannabis stocks, this is the only one that jumps out at me as having real potential and could maybe fall under the ‘fun’ section of a portfolio.

If possible it would be great to see one of your reports on them if you think it’s worth the time.

Thank you!

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Asked on October 1, 2020 6:10 pm

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Check the news and do a deep dive into its financials and operations. From the news posts, I think it's expanding quite fast and may not be able to keep up with revenues, so that is affecting its bottom line - I suspect this, but did not do a deep dive to check. I like that it's making deals in many countries. Once the EPS starts to increase, that stock IS taking off, so mark down it's earnings release dates and keep a close eye on it. And no, I'm not one of the gamblers who hung their hopes and dreams on weed. I told people not to buy weed stocks, when they became the new bitcoin.

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Posted by Denise LeBelle

Answered on October 1, 2020 9:51 pm

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HI there,

MediPharm (LABS) is one I looked at quite seriously about six months ago when it was trading around $1.80ish per share. Like you, I preferred its business model over producers and it had a pretty decent track record of growing revenue and surprise - it was generating profits! ALthough in 2020, it is expected to post a loss before being profitable again in 2021.

However, I opted not in invest because of the general sentiment towards the entire industry. The industry is mired it a significant downtrend, and there is no real good news stories. It is why I avoided the company, but I keep tabs on it.

One of the issues with the industry (LABS included) is the lack of consistency. Case in point, LABS has missed estimates in 4 of the past 6 quarters - with some pretty big misses. Revenue also seems to be stagnating. It generated $129M in 2019, but on a TTM it is only at $118M. I haven't followed the company extensively since COVID - so not sure if this a direct result of COVID, which it could definitely be. From a valuation perspective it also looks decent - trading below book value and at a P/S of only 1.1.

Overall, it is not one I'd rush into but it is certainly one of the most interesting names in the industry. If there came a point where I wanted to jump back into the industry, LABS would be one of the first I'd be looking at.

Mat

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Posted by Mathieu Litalien

Answered on October 1, 2020 7:01 pm

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