Tilray Brands: Cannabis Legalization Could Be Sooner Than Expected

Summary:

• Reintroduction of SAFE Banking Act could be the first meaningful step toward legalizing cannabis.
• TLRY already has relationships with distributors in the US thanks to its alcohol operations.
• Acquiring HEXO solidifies TLRY’s stature as the world’s largest cannabis company.
• HEXO’s recognizable brands could help TLRY secure a large share in the US market once cannabis is legalized.

While hopes for federal cannabis legalization took a massive hit last year, there are renewed hopes that cannabis could be legalized federally as the SAFE Banking Act was recently reintroduced in the House and Senate. Although the legislation that would make banking services available for the cannabis industry stalled in last year’s Congress, its reintroduction could signal a shift in the sentiment which would ultimately lead to the much-anticipated cannabis legalization on the federal level.

Canadian LPs are the companies that are set to benefit the most from federal legalization since they already have the infrastructure to distribute their products on a national level as they are operating in the legal Canadian market. One Canadian LP that I believe is well-positioned to take advantage of the anticipated legalization is Tilray Brands, Inc. (NASDAQ:TLRY).

In a previous article, I discussed why I’m bullish on TLRY stock thanks to its growing US alcohol business and its relationships with US distributors that would aid the company in distributing its products throughout the US market.

Despite TLRY’s stock price dropping since then, I remain bullish on TLRY’s outlook thanks to its recent moves that solidified the company’s stature as the world’s largest cannabis company.

Acquiring Its Rival

The Canadian cannabis market is highly competitive with nearly 1000 LPs which has caused cannabis prices to drop nearly 40% over the past year. In addition, the legal cannabis market faces strong competition from the black market which further adds pressure to LPs’ ability to become profitable since they have to pay an excise tax – unlike the black market. With cannabis prices falling and the excise tax remaining a fixed amount per gram not a percentage of the total price, profit margins for Canadian LPs were negatively impacted – adding further pressure on Canadian LPs’ share prices.

Looking to improve its fortunes in this highly competitive market, TLRY fully acquired HEXO Corp. (HEXO) – its biggest rival in the Canadian market. By acquiring HEXO, TLRY is further solidifying its stature as the largest cannabis company in Canada in terms of market share which increased to 12.9% of the Canadian cannabis market.

Not only does this acquisition improves TLRY’s market share it also adds new capabilities and recognized brands under TLRY’s umbrella. Redecan – ranked as the 7th cannabis brand in Canada – is one of HEXO’s most profitable brands which would operate under TLRY following the completion of the acquisition. In this way, TLRY could take advantage of Redecan’s recognizable brand in growing its revenues from the Canadian market.

It is clear that this acquisition would be extremely beneficial for TLRY’s operations in the Canadian market, but most importantly, this acquisition could aid TLRY’s fortunes in the US once cannabis is legalized federally. HEXO and TLRY are the Canadian market leaders in flower, pre-rolls, flower oils, capsules, and beverages, and combining their capabilities could make Tilray a dominant force in the US market once cannabis is legalized.

SAFE Banking Act Reintroduction

While the SAFE Banking Act was stalled in Congress last year, the act was reintroduced in the House and Senate recently by a group of bipartisan lawmakers. These bipartisan efforts show that there is a strong possibility that the act passes a Senate vote and become law. While the SAFE Banking Act is mainly focused on providing banking services for cannabis operators in legal markets, it could be seen as the first step to legalizing cannabis on a federal level.

Currently, there is a strong movement among states to legalize cannabis as the Minnesota House of Representatives recently passed a bill to legalize the recreational use of marijuana. If successfully signed into law, Minnesota would become the 23rd state to legalize recreational cannabis.

Moreover, the Texas House of Representatives passed a bill that would decriminalize cannabis and a House committee heard testimony on a separate bill that aims to legalize and regulate cannabis sales in the state. With more and more states realizing the potential of legalizing cannabis, I believe federal legalization might be closer than ever. For this reason, I believe TLRY is a bargain near all-time lows.

Risks

However, it is not all sunshine and rainbows with TLRY. Since federal legalization is the main catalyst for Canadian LPs, it may not take place despite the growing state efforts to legalize it. In that case, Canadian LPs might find it hard to become profitable considering the price compression and the excise tax in the Canadian market.

Another risk that TLRY has is its potential to significantly dilute shareholders since the HEXO acquisition would be an all-stock deal which would require TLRY to issue new shares to HEXO shareholders. Considering the dilutive impact of this deal, TLRY’s share price could drop to new all-time lows if the company remains unable to grow its revenues at the required rate.

Technical Analysis

Looking at the daily chart, TLRY is trading in a downward channel and is below the 200, 50, and 21 MAs. Currently, TLRY is testing the 21 MA and upper trendline resistance which is a critical level for the stock. If TLRY is able to break this resistance, it could run to its next resistance near $2.75. However, if TLRY fails to break this resistance, it could drop near its all-time low of $2.18. Considering TLRY’s long-term potential if cannabis is federally legalized, I believe the stock would be a smart buy at current levels.

Conclusion

With the SAFE Banking Act reintroduced to the House and Senate, the outlook for Canadian LPs is bullish as this could be the first step to legalize cannabis on a federal level. As TLRY is the world’s largest cannabis company, the company would find it easy to penetrate the US market – especially due to its existing relationships with distributors for its US alcohol operations. In addition, acquiring HEXO provides TLRY with a competitive advantage since the company would be the only leader in several cannabis segments in the Canadian markets. Considering that the Canadian market is more mature than the US cannabis market, TLRY would be a dominating force in the US once cannabis is legalized.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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