Enterprise-value-to-sales multiple

The forward enterprise-value-to-sales multiple takes into account estimates for the one-year forward analysts’ sales estimates for cannabis companies. For most cannabis companies, using this valuation multiple is reasonable due to the anticipated sales increase being priced into the current stock price. It’s a highly sensitive factor since the size of the market and the demand are not known with a high level of certainty at this point. However, we can look at the valuation multiples to interpret what the market thinks.

Forward EV-to-Sales Multiple for Cannabis Sector 2018-05-27

Multiple volatility

Last week, which ended May 25, the forward enterprise-value-to-sales multiple for the Canadian cannabis sector (represented by the yellow line in the above chart) declined to 10.4x from the peak of 11.94x in the week ended May 11. The forward multiple for the sector, including US pharmaceutical companies with exposure to medical cannabis drugs (represented by the blue line in the chart), was stable at 7.8x.

Essentially, the forward enterprise-value-to-sales multiple shows that on average, a marginal investor paid 10.4 times per unit of forward sales for cannabis players. Digging into the median composition, as of May 25, Canopy Growth (WEED) was trading at a forward enterprise-value-to-sales multiple of 16.9x, Aphria (APHQF) was trading at 11.2x, Cronos (CRON) was trading at 16x, and Aurora Cannabis (ACB) (ACBFF) was trading at 10.4x. OrganiGram was trading at 5.9x, CannTrust Holdings was trading at 6.3x, and Hydropothecary was trading at 7.7x, which were all well below the median.

It’s not surprising that the median for Canadian cannabis producers is more volatile, given the frequent news of acquisitions by some of these producers (HMLSF), which affects their sales estimates.