How cannabis is firing up the U.S. supply chain
U.S. companies cannot stop talking about marijuana, hoping in part they can catch investor interest as the booming economy around the drug lifts revenues throughout the supply chain.
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.
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."
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
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