Village Farms International Inc: 240% Return from a Non-Pure-Play Pot Stock?

VFF stockWant to Profit from Pot Stocks? Read This

“For investors who want a piece of the action in the booming cannabis industry, this greenhouse operator—which is expected to have a prominent cannabis producer as a wholly-owned subsidiary soon—deserves a serious look.”

That’s what I told readers of Profit Confidential about Village Farms International Inc (NASDAQ:VFF) last October. In that article, I explained why VFF stock, which did not look like a typical pot stock, could represent an opportunity for cannabis stock investors.

When the article was published on October 9, 2020, Village Farms stock was trading at $5.00 per share. Now it’s at $17.08 per share, marking a return of more than 240%.

After a stock experiences a massive rally in a short period, there are usually pullbacks. And as you can see from the VFF stock chart below, the company’s shares did have retracement and consolidation phases over the past few months.

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However, if you look at Village Farms International’s business, you’ll see that the company’s growth theme remains intact.

Village Farms International Inc (NASDAQ:VFF) Stock Chart

Chart courtesy of StockCharts.com

Village Farms is one of the largest greenhouse operators in North America. Headquartered in Delta, BC, Canada, the company has been around since 1989 and was known for growing tomatoes, bell peppers, and cucumbers.

In my previous article on Village Farms, I mentioned that, a few years ago, the company formed a joint venture with Emerald Health Therapeutics Inc (CVE:EMH, OTCMKTS:EMHTF) for large-scale cannabis production called Pure Sunfarms Corporation.

I pointed out that one of the catalysts for Village Farms stock was that, at the time, the company had just announced a plan to acquire Emerald Health’s stake in the joint venture, which would allow Village Farms to own 100% of the pot producer.

Fast-forward to now, and Pure Sunfarms is indeed a wholly-owned subsidiary of Village Farms. The acquisition was completed in November 2020. (Source: “Village Farms International Completes Acquisition of Pure Sunfarms’ Shares to Own 100% of Canada’s Premier Cannabis Supplier,” Village Farms International Inc, November 2, 2020.)

The reason I liked this move was that, even though Pure Sunfarms was not as well known as some of the other players in the Canadian weed industry, it had established a strong market position and was financially sound.

According to the company’s latest investor presentation, Pure Sunfarms’ 1.1-million-square-foot Delta 3 facility produced approximately 50,000 kilograms (110,231 pounds) of pot in 2019. (Source: “An Unmatched Platform for the International Cannabis Opportunity,” Village Farms International Inc, last accessed February 19, 2021.)

The Delta 3 facility comes with a new state-of-the-art 65,000-square-foot processing center. Moreover, Pure Sunfarms has received an initial cultivation license for its Delta 2 facility, which also spans 1.1 million square feet.

Pure Sunfarms has become one of the top retail cannabis suppliers in Canada, with its products now available in five of the six largest provincial markets in the country. It’s also one of the few profitable licensed marijuana producers in Canada.

In fact, Pure Sunfarms has achieved seven consecutive quarters of positive net income and eight consecutive quarters of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Thanks to the growth of Pure Sunfarms, Village Farms International Inc has been enjoying improving financials.

In the third quarter of 2020, Village Farms generated $43.0 million of revenue, which represented a 12% increase year-over-year. Its adjusted EBITDA surged 59% year-over-year from $2.9 to $4.6 million. (Source: “Village Farms International Reports Third Quarter 2020 Financial Results,” Village Farms International Inc, November 13, 2020.)

But the best part was the bottom line. In the year-ago quarter, the company incurred a net loss of $0.01 per share. This time, the company earned net income of $0.01 per share.

Looking at Pure Sunfarms, we see that, in the third quarter of 2020, the cannabis subsidiary’s net sales surged 75% sequentially to CA$22.6 million, its adjusted EBITDA rose 125% to CA$5.6 million, and its net income increased by a whopping 200% to CA$3.2 million.

Keep in mind that, because Village Farms’ acquisition of the remaining interest in Pure Sunfarms was not completed until November 2, Village Farms International Inc’s financials in the third quarter of 2020 only included its then-proportional share (58.7%) of Pure Sunfarms’ results.

Now contributing as a wholly-owned subsidiary, Pure Sunfarms could take Village Farms’ financial growth to a whole new level.

Furthermore, Pure Sunfarms is doing more than just growing marijuana plants. The company has also launched Cannabis 2.0 products such as bottled oils and vapes. These products tend to command higher margins than dried flower.

Village Farms’ chief executive officer, Michael DeGiglio, said the following in the company’s third-quarter earnings press release:

With 75% sequential growth in dollar sales, Pure Sunfarms’ third quarter highlighted its strong sales momentum as its leading brand continues to resonate with consumers. Importantly, this sales momentum was achieved with only a small contribution from Pure Sunfarms’ Cannabis 2.0 and bottled oil products, which were launched late in the quarter.

(Source: Ibid.)

Analyst Take

Because Village Farms International Inc was previously known as a tomato and cucumber grower, VFF stock did not initially get as much attention as some of the pure-play pot stocks. But now with a 100% stake in a strong cannabis producer, the company has entered a new era.

The market has also noticed Village Farms stock’s potential and rewarded it with a higher share price. If the company’s growth momentum continues, this pot stock could see even better days ahead.