Regulations surrounding cannabis in the U.S. are far from settled, and the legal status of various cannabis-derived products for recreational or medical use can vary significantly from one jurisdiction to the next. In this shifting landscape, companies focused on cultivating, producing, and selling cannabis products face a challenging and shifting set of regulatory hurdles.
In the upcoming November election, the legal status of cannabis will once again be on the ballot in several states. Arkansas, Florida, Nebraska, and both North and South Dakota will vote on measures to either legalize marijuana or loosen existing regulations.
Given its widespread uses in industries including food and beverage, cosmetics, and pharmaceuticals, among others, cannabis represents a large and rapidly growing business. The size of the U.S. cannabis market as of 2023 has been estimated at over $33 billion, with an anticipated compound annual growth rate of a whopping 12% through 2030.
Village Farms' Balance Sheet, Sales Growth, and Valuation
Village Farms International Inc. (NASDAQ: VFF) is a controlled environment agriculture company that devotes a prominent portion of its business to cannabis in both the U.S. and Canada. The firm balances that against traditional produce and energy segments, which act as a built-in hedge against uncertainty in the cannabis space. Village Farms stands out among cannabis companies for its recent rise in cash flow, strong total sales growth, attractive valuation, and expanding market share.
Like many other cannabis companies, Village Farms has at times struggled to maintain positive cash flow. However, in the second quarter, the company posted consolidated cash flow from operations of $5.7 million, a reversal from negative cash flow of $5.2 million in the prior-year quarter. In Village Farms' Canadian cannabis segment, cash flow surged by 38% to $5.4 million.
Village Farms' total sales business-wide climbed by 19% year-over-year for the latest quarter, driven by an uptick in both retail branded sales of 35% and Canadian cannabis net sales of 45%. These figures reveal that the scope of the company's brand is growing, and it is fast becoming one of the dominant names in the Canadian cannabis market. Because cannabis is more broadly legal for both recreational and medical use in Canada, it represents a more accessible market than the U.S. overall.
Village Farms posted a net loss in the most recent quarter, making a P/E ratio impossible to calculate for that period. However, enjoys a price-to-book ratio of just 0.35, an indicator that shares may be undervalued in the market today. The company has a price target of $1.20, which represents more than 22% upside potential.
Canadian Cannabis Operation Shines
With the latest sales figures, Village Farms' Canadian cannabis business is closing in on the number one market share position for dried flower and pre-rolled products. The company's Canadian operations have fast become the bright spot in Village Farms' overall business. This is in stark contrast with Village Farms' U.S. cannabis segment—in the latter case, net sales actually declined year-over-year for the most recent quarter, and modest net income last year shifted to net losses.
In the latest quarter, Village Farms fully internalized its U.S. cannabis gummy production. Though restructuring of this kind can be costly up front, it does help to build a base for achieving gross profit in future quarters. The firm also said it expects this shift will support consistency of supply going forward.
A key barrier to the success of the U.S. cannabis operations are regulatory hurdles. At the end of the second quarter, the company said it was waiting on approval of its application for a Texas medicinal marijuana license. Until it receives approval, this regulatory hold-up limits sales and increases costs for the firm.
Village Farms: Room For Growth in U.S. Cannabis Business
Village Farms has only pivoted toward the cannabis space in the last few years. This move has proven to be a savvy one, however, as the company's rising net sales and gross margins are largely thanks to the success of its Canadian cannabis business. A component of the company's operations that is still developing—but which could enjoy a similar degree of success—is its U.S. cannabis operation. Easing regulatory environments across the country could help to facilitate further growth in this area.
