Valens GroWorks Corp: Bullish Cannabis Stock Up 225% in 2019 on Record Results

Valens GroWorks Corp: Bullish Cannabis Stock
iStock.com/Tinnakorn Jorruang

Valens GroWorks Corp Remains Bullish on Record Results

Valens GroWorks Corp (OTCMKTS:VGWCF, CVE:VGW) has been one of the strongest marijuana stocks in an otherwise underwhelming cannabis sector. Currently trading near $3.20 per share, VGWCF stock is up about 225% year-to-date and is about 2.5% from its 52-week high.

What’s juicing Valens GroWorks stock? Record first-quarter and second-quarter financial results, increased annual extraction capacity, and new extraction agreements with the likes of Tilray Inc (NASDAQ:TLRY) and HEXO Corp (NYSE:HEXO).

While even some of the biggest names in the cannabis sector are burning up right now, Valens continues to have a bright future.

Valens GroWorks Corp Overview

Valens GroWorks is the largest third-party cannabis extraction company in Canada, with annual extraction capacity of 425,000 kilograms (936,964 pounds) of dried cannabis. (Source: “Valens Reports Record $8.8 Million in Revenue and Adjusted EBITDA of $2.0 Million in the Second Quarter of Fiscal 2019,” Valens GroWorks Corp, July 15, 2019.)

Advertisement

That capacity is expected to soar to over 1.0 million kilograms (2,204,623 pounds) once the company’s next phase of construction is completed in the first quarter of 2020.

This allows the Kelowna, British Columbia-based company to help some of the biggest names in the North American cannabis industry turn their pot into extracts.

Extracts and cannabis-infused products like edibles, beverages, topicals, oils, and tinctures, are the fastest growing segment of the cannabis industry. Cannabis-infused products are legally available in some parts of the U.S., but they are only legally hitting the shelves in Canada in December.

It takes a lot of cannabis flower to create extractable products. The efficiency rate of extraction is just 12% to 26%, meaning that 100 grams of cannabis yields just 12 to 26 grams of cannabis oil. (Source: “Canada’s pot shortage could last 5 years amid edibles demand: Expert,” BNN Bloomberg, January 22, 2019.)

Valens has three wholly owned subsidiaries that conduct formulation, testing, extraction, and product development.

VGWCF Stock Information
Market Cap $387.9 Million
52-Week High $3.66
52-Week Low $0.79
Shares Outstanding: 72.4 Million
Float 83.5 Million
50-Day Moving Average: $3.04
200-Day Moving Average: $2.52

(Source: “Valens GroWorks Corp. (VGWCF),” Yahoo! Finance, last accessed July 17, 2019.)

Valens GroWorks stock has been bullish in 2019, hitting a new 52-week high on April 30, shortly after announcing record first-quarter financial results.

But that momentum hit a brick wall in May. The broader markets swooned, resulting in the worst May on Wall Street since 2010. Then June happened and the markets rebounded; it ended up being the best June on Wall Street since 1955.

The cannabis industry continues to struggle though. Valuations for most pot stocks are sky-high, weed companies are burning through tons of money, and the financials are not as exciting as cannabis CEOs have been promising. Probes by Health Canada into illegal growing have also created unexpected headwinds affecting the entire industry.

Valens, on the other hand, has been churning out record numbers and it continues to have a strong balance sheet.


Chart courtesy of StockCharts.com

Record Q2 Results

On July 15, Valens GroWorks announced that its revenue for the second quarter (ended May 31, 2019) was a record $8.8 million. (Source: Valens GroWorks Corp, op. cit.)

The company didn’t report any revenue in the second quarter of 2018, but the $8.8 million is a 296% increase from the record $2.2 million recorded in the first quarter of 2019.

Second-quarter 2019 gross profit was $5.1 million (58% of revenue), a sharp improvement from the $900,000 (38.3% of revenue) recorded in the first quarter of 2019.

Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) came in at $2.0 million (23% of revenue).

Valens continues to have a strong balance sheet, ending the quarter with cash, cash equivalents, and short-term investments of $65.6 million. The company also had a net working capital position of $76.3 million.

During the second quarter, Valens processed 8,547 kilograms (18,843 pounds) of dried cannabis and hemp biomass. That’s a 376% increase from the first quarter.

In the first 45 days of the third quarter (ended August 31), Valens had already processed 7,348 kilograms (16,200 pounds). As mentioned earlier, those numbers are expected to increase significantly.

Valens also announced three extraction agreements, with HEXO, Green Organic Dutchman Holdings Ltd (OTCMKTS:TGODF, TSE:TGOD) and the privately held Tantalus Labs.

The company also expanded the size and scope of its agreement with Tilray by 300% to 60,000 kilograms (132,277 pounds) per year. Tilray also added contract manufacturing services to the multi-year agreement.

Analyst Take

Valens GroWorks Corp seems to be doing everything right. It moved into commercial production in the first quarter and has been reporting record results since then. It has significantly increased its production volumes, which helped it increase its efficiency targets and strengthen its gross margins.

The company increasing its production capacity will help it meet the growing demand for cannabis-infused products.

It’s doing all of this while still maintaining a strong balance sheet.

Valens has been developing a growing, sustainable business that will eventually be consistently profitable. That’s a rarity in the legal cannabis industry. And that should be good for VGWCF stock investors.