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 With the recreational use of cannabis now legal in 10 states and the
District of Columbia and medical marijuana legal in 23 states,
marijuana is on its way to becoming an $80 billion industry in the
United States by 2030, according to estimates by Cowen Inc.
That outsized growth is starting to bleed into adjacent industries
ranging from energy to packaging to point-of-sale technology whose
products are used in the production or sale of marijuana. As
investors circle the cannabis space, supply-chain companies are
showing a new willingness to associate themselves with an industry
that remained largely illegal a decade ago.
Cryogenic equipment manufacturer Chart Industries Inc told analysts
on Feb. 14 that "cannabis has double-digit growth potential for us"
as more grow houses use liquefied carbon dioxide in the extraction
of marijuana. Point of sale company Socket Mobile Inc said on Feb.
13 that cannabis dispensaries are "ideally suited to iPad-based
point-of-sale solutions for accounting and regulatory compliance."
And private security company Brinks Co said on Feb. 6 that its North
America segment should have "another strong year" due in part to the
growth of the cannabis industry.
"You're starting to see a repurposing of the supply chain and that
could give some companies another leg of growth," said Chris Retzler,
a portfolio manager of the Needham Growth fund. "This has the
potential to drive revenues higher and lead to some earnings
surprises."
HOW BIG A BOOST?
In a sense, many companies are looking to replicate the strategy of
lawn and garden products company Scotts Miracle-Gro Co, which has
transformed itself over the last four years into a player in the
cannabis industry by focusing on the sales of lighting, fertilizer
and growing systems specifically for marijuana. Shares of the
company, which acquired a competitor in hydroponics for $450 million
in 2018, are up nearly 30% for the year to date, a rally about
double that of the benchmark S&P 500.
But just how much revenue will come from cannabis-related sales into
businesses that are further afield from the plant remains unclear.
For supply chain companies like Chart Industries, revenue from
cannabis "realistically could be a couple of percentage points a
year," said Pavel Molchanov, an analyst at Raymond James.
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Yet that does not mean it will be insignificant, he said.
"In the Gold Rush it was the people who were making the picks and
shovels for gold miners that made the most money. This is a case of
a company that has absolutely nothing to do with cannabis
historically, yet it's benefiting from the picks-and-shovels
opportunity," he said.
Jillian Evanko, the chief executive of Chart, told Reuters in an
interview that cannabis is now the fastest-growing segment of its
business, and that the company has undisclosed products in its
pipeline made specifically for use in the marijuana industry.
"Historically we did not focus on these markets, but now we have
dedicated teams both commercially and technical (engineering/product
development) to develop these markets further," she said.
NO LONGER OPEN SECRET
The outsized investor interest in cannabis and growing recognition
of cannabis as a therapeutic drug may prompt more company management
teams to openly discuss how their products are used by the marijuana
industry in hopes of attracting shareholders, said Brett Hundley, an
analyst at Seaport Global.
Some, like alcoholic beverage company Constellation Brands Inc and
tobacco company Altria Group Inc, are making investments into the
cannabis industry to proactively move into an industry that poses a
threat to their existing business lines, he said.
Yet others are starting to discuss cannabis as a way to tap in to
changing attitudes toward marijuana, Hundley said.
"I was on a Balchem conference call a few weeks ago and we asked the
company if they were considering getting into cannabis, and the CEO
talked about how we've been supplying minerals to grow houses," he
said. "I literally watched the stock jump 2% from the time I asked
the question to the time he answered it. Anything associated with
cannabis today is getting an increase in market value."
(Reporting by David Randall in New York; Editing by Jennifer Ablan
and Matthew Lewis)
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