Wall Street has been betting on the marijuana industry since the election of Joe Biden as the U.S. President, given his advocacy of the decriminalization of cannabis. Canada-based marijuana and fresh foods producer Village Farms International, Inc. (VFF) is a case in point. The stock has gained 349.3% over the past year, and 22.3% year-to-date.
The stock’s impressive price performance and market valuation led to its inclusion in the S&P/TSX Composite index on March 22. VFF’s high market capitalization, nearing $1 billion, and average trading volume of 3.23 million factored into the decision to include the stock in the Canadian index.
With several states legalizing cannabis, Wall Street expects VFF to gain more than 70% and achieve fresh highs soon.
Here’s what we think could shape VFF's performance in the near term.
Industry Headwinds and Tailwinds
VFF has substantial exposure to agriculture. It produces and markets several fresh food items across North America. However, with the industrial and services sectors expected to be at the forefront of the impending, post-pandemic economic recovery, VFF’s income from this segment will likely decline. U.S. gross cash farm income and net farm income is expected to decline marginally this year. And in Canada, the total principal field crops for domestic use are expected to decline by 2% this year. These factors are expected to drive down VFF’s revenues significantly.
Income from operations in the cannabis segment, in contrast, is projected to rise, offsetting the decline from agricultural revenues. While marijuana is already legal in Canada, its legalization in the United States should boost VFF’s sales significantly. While President Biden is currently dealing with the country’s economic recovery long-time advocate of cannabis legalization, Senate Majority Leader Chuck Schumer, is reportedly working on such a bill. Furthermore, even Mexico plans to legalize marijuana soon, which would make the country the largest legal cannabis market in the world. VFF’s cannabis segment, which operates across the North American continent, should benefit significantly from these potential changes.
Declining Operating Margin
VFF’s trailing-12-month net income was $11.60 million, despite reporting operating losses of $14.27 million over the past year. Also, the company’s net income is higher than its trailing-12-month gross profits of $10.96 million.
VFF’s oddly high net income can be attributed to earnings generated from interest income and unusual earnings. The company’s trailing-12-month EBT, including unusual items, amounted to $8.80 million, while interest and investment income was $600,000. It should be noted that the annual earnings (before taxes) from unusual items have declined over the past three years consecutively until 2019. VFF has failed to generate adequate profits from its day-to-day operations despite reporting more than $170 million in revenues over the past year. In addition, the company’s operating expenses have increased 17.2% year-over-year to $25.20 million.
Consensus Rating and Price Target Indicate Potential Upside
Of six Wall Street analysts that rated the stock, five rated it Buy, while one rated it Hold. VFF is expected to hit a 12-month median price target of $21.69, indicating a potential upside of 74.9%. Analysts have issued a high forecast of $26, and a low forecast of $18.
Premium Valuation
In terms of non-GAAP forward P/E, VFF is currently trading at 98.53x, 363% higher than the industry average 21.28x. The stock’s non-GAAP forward PEG ratio of 4.93 is 58.7% higher than the industry average 3.11.
The company’s forward price/sales and price/cash flow multiples of 4.27 and 187.99, respectively, are significantly higher than industry averages.
Unfavorable POWR Ratings
VFF has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
VFF has a grade of C for Value, and D for Growth and Stability. Along with premium valuation, VFF stock has a five-year monthly beta of 3.87. Also, the company’s EBITDA declined 65.5% year-over-year, justifying the Growth grade.
VFF is ranked #23 of 41 stocks in the Agriculture industry. In addition to the grades we’ve highlighted, one can check out additional VFF Ratings for Momentum, Sentiment, and Quality here.
Check out the top-rated stocks in the Agriculture industry here.
Bottom Line
The legalization of marijuana has been overshadowed by the economic recovery efforts of the Biden Administration. Despite voicing his support for the federal decriminalization marijuana, Biden has yet to take any action on the matter. With economic recovery from the pandemic expected to remain his administration’s main concern over the next couple of months, VFF’s operating margins are not likely to improve anytime soon. Thus, we think VFF stock is best avoided now.
VFF shares were trading at $12.31 per share on Thursday morning, down $0.09 (-0.73%). Year-to-date, VFF has gained 21.40%, versus a 9.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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