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I Wouldn’t Jump on the Tilray Bandwagon, But Here’s What I Would Do

Tilray (TLRY) surprised Wall Street on Monday morning with some profitability, even if revenues disappointed. For their fiscal second quarter, the firm posted GAAP EPS of $0.00, which beat Wall Street by roughly a dime, and showed as a significant improvement from the loss of $0.37 per share reported for the comparable year ago period. Net income hit the tape at $6M, up from $-89M a year ago. However, Tilray generated just $155.15M in revenue for the period, good for year over year growth of 19.8%, but well short of Wall Street’ss expectations.

There were some significant accomplishments over the three months ending November 30th. Tilray points out that the firm has achieved $70M in cost synergies from the Aphria merge, and is on track to exceed the original plan of $80M ahead of schedule. Tilray also points out the potential for an additional $20M in cost synergies for fiscal 2023.

Tilray posted adjusted EBITDA of $13.8M, for an eleventh consecutive quarter of positive adjusted EBITDA, while adjusted gross margin for the cannabis segment landed at 43% for a second consecutive reporting period.

Segment Performance

The firm’s largest business, Distribution, actually drove less revenue for this quarter, $68.9M, than for the same period one year ago ($73.9M), as this segment still drove 44% of the firm’s sales, down from 57% a year ago. Cannabis drove 38% of sales at $58,8M, up from $54.8M a year ago. Newcomer segments Wellness ($13.8M), and Beverage Alcohol ($13.7M) contributed 9% a piece toward the revenue pie, and were not really part of the picture last year.

The CEO

Chairman and CEO Irwin D. Simon commented… “Our second quarter performance reflects notable success building high-quality and highly sought after cannabis and lifestyle CPG brands which, coupled with our scale, operational excellence and broad global distribution, enabled us to increase sales and maintain profitability despite sector-specific and macro-economic headwinds.”

On regional adaptation, the CEO went on… “Looking at performance highlights across key markets, we maintained our #1 cannabis market share position in Canada – despite market saturation and related competitive challenges – on the strength of our brands and adept pricing and market adjustments. In Germany – Europe’s largest and most profitable medical cannabis market – our nearly 20% share leads the market.”

Simon added, “Turning to the U.S., Sweetwater Brewing and Manitoba Harvest continued to invest in product innovation and acquisitions to enhance awareness and distribution. These profitable businesses further provide an opportunity to launch THC-based products upon federal legalization in the U.S.”

The Balance Sheet

First, almost everything is smaller. Second, though down significantly from six months ago, the firm’s cash balance still stands at more than twice the firm’s long-term debt load (also down). I like that. Current assets stand more than twice current liabilities. The current ratio is obviously in fine shape. Total assets stand at almost five times total assets less equity. That would be great, but one entry screams out at me. Goodwill. It has not changed, but it does dominate the asset side of the balance sheet. At more than $2.8B, the entry for goodwill accounts for 48.8% of total assets. That seems right to you? Given that total total hard assets would still decisively outweigh total liabilities, it only makes me wonder “why?” That, I don’t like.

My Thoughts

The firm does seem to be improving its execution. Of that, I don’t think there is any doubt. You think the Tilray brand name is worth $2.8B? Market cap is barely above $3B. Does give me pause. 11% of the float is short. Could see a mini short squeeze this morning.

Nice chart. Not. The shares came in Monday morning severely oversold from a technical perspective. That said, by either Relative Strength or the Full Stochastics Oscillator, Tilray has been oversold for almost two months straight. I came into this piece thinking that maybe I would put this name into the “Stocks Under $10” portfolio, or at least in the bullpen.

I changed my mind. Not only would I not jump on this morning’s bandwagon, I think if I were long these shares that I would take advantage of short sellers forced to chase the stock this morning and make a sale. That entry for goodwill. I just don’t like it.

Sarge out.

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