Analysis: How cannabis is firing up the U.S. supply chain

Balchem

04/04/2019 18:22

By David Randall
    NEW YORK, April 4 (Reuters) - 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
 GTLS.O  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  SCKT.O  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  BCO.N  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  SMG.N , 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  .SPX . 
    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  STZ.N  and tobacco company Altria Group Inc  MO.N , 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  BCPC.O  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)
 ((David.Randall@thomsonreuters.com
+1 646 223-6607
Reuters Messaging:
david.randall.thomsonreuters.com@reuters.net))