A Pot Stock to Think About
Imagine a company that has a 50% joint venture (JV) in one of the fastest-growing industries today, and that JV just delivered triple-digit sequential sales growth. What do you think would happen to the company’s share price?
Investors should cheer for the news, right?
Well, that was not the case with Village Farms International Inc (NASDAQ:VFF).
Village Farms is a producer of greenhouse tomatoes, bell peppers, and cucumbers. What’s more exciting than growing these vegetables, however, is that the company owns 50% of Pure Sunfarms Corp., one of the largest vertically integrated cannabis producers in Canada.
In other words, VFF stock is climbing on board the marijuana profit train.
On August 12, Village Farms International reported that, in the second quarter of this year, Pure Sunfarms generated CA$32.4 million of revenue. The amount represented a 125% increase from the first quarter. (Source: “Village Farms International Reports Strong Second Quarter 2019 Results,” Village Farms International Inc, August 12, 2019.)
Notably, Pure Sunfarms’ top-line number came entirely from the sale of dried cannabis.
And the business was very lucrative, with a gross margin of 84%. During the quarter, the all-in cost for the JV to produce one gram of pot was just CA$0.65.
At the bottom line, Pure Sunfarms earned a net income of CA$37.2 million, marking an even more impressive 226% increase sequentially. Worth noting is that this marked the JV’s third consecutive quarter of profitability.
Furthermore, the Village Farms earnings report revealed that Pure Sunfarms’ 1.1-million-square-foot “Delta 3” greenhouse in Delta, British Columbia had achieved a run-rate production capacity of 75,000 kilograms (165,347 pounds).
Delta 3 was also the world’s first and only single-site cannabis operation to exceed one million square feet.
These things should be huge catalysts for Village Farms stock. But as I said, stock market participants didn’t really cheer for the news. As a matter of fact, since that earnings release, VFF stock has tumbled by more than 30%.
Village Farms International Inc (NASDAQ:VFF) Stock Since Last Earnings Report
Chart courtesy of StockCharts.com
That’s quite disappointing, right?
Well, keep in mind that recent months haven’t been that nice to companies in the marijuana industry. As uncertainty levels increased, investors switched from “risk-on” to “risk-off.” As it turned out, pot stocks happened to be some of the most sold-off tickers.
To give you an idea, the North American Marijuana Index has plunged 36.7% over the past three months. (Source: “North American Marijuana Index,” The Marijuana Index, last accessed October 8, 2019.)
And that’s why I think the downturn in VFF stock could be an opportunity. Shares of Village Farms had a serious sell-off, not because of any deterioration in the company’s business, but because of a change in market sentiment.
Of course, the bears can argue that those growth rates came from Village Farms’ JV and not the company itself
In the second quarter of 2019, Village Farms’ company-level net income before tax came in at $9.9 million. That included the contribution of positive net income from Pure Sunfarms of $14.0 million. In the year-ago period, Village Farms recorded a net loss of $2.3 million.
That means it was actually the contributions from the JV that allowed Village Farms International Inc to turn a profit at the bottom line in the second quarter of this year. Therefore, saying that Pure Sunfarms is a catalyst for VVF stock would not be an overstatement.
The best part is, the company’s pot business is just getting started. In the second quarter, most of Pure Sunfarms’ cannabis was sold to other licensed producers. Now, things are quite different.
In September, Village Farms announced that Pure Sunfarms launched its own brand and introduced eight strains of dried pot flower to the Canadian recreational weed market. (Source: “Village Farms International’s Cannabis Joint Venture Pure Sunfarms Begins Shipping Branded Product to Ontario Cannabis Store, Launches Brand and Introduces Eight Products for the Recreational Market,” Village Farms International Inc, September 16, 2019.)
In the same announcement, Village Farms said that Pure Sunfarms has started shipping branded cannabis products to the Ontario Cannabis Store (OCS).
OCS is a Crown corporation that operates the only legal online recreational cannabis store in the province of Ontario. It also acts as a wholesale distributor to privately operated and licensed brick-and-mortar pot stores.
More recently, Village Farms announced that Pure Sunfarms began shipping its branded pot products to the British Columbia Liquor Distribution Branch (BCLDB), the sole distributor of non-medical cannabis in the province of British Columbia. (Source: “Village Farms International’s Cannabis Joint Venture Pure Sunfarms Begins Shipping Branded Product to British Columbia Provincial Wholesaler,” Village Farms International Inc, October 4, 2019.)
Added together, Ontario and British Columbia have more than half of Canada’s population. Being able to distribute products to these two provinces could translate to serious growth at Pure Sunfarms.
Village Farms 1-Year Stock Chart
Chart courtesy of StockCharts.com
While Village Farms stock hasn’t been a market favorite in recent months, its performance over the long term is actually quite impressive. Over the past year, the greenhouse grower’s share price has surged 73.5%.
Given how fast Pure Sunfarms has been expanding, there is still a good reason to check out Village Farms International Inc. Once investor sentiment turns more bullish toward the cannabis industry, VFF stock could get back on its upward trend.