Legal Pot Business Could Get a Big Jolt on Path to $50B Industry

November 8, 2016 2:00 PM EST
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In addition to the all-important Presidential and Congressional races, marijuana is a huge ballot issues today. The legalization of recreational is on the ballot in Arizona, Massachusetts, Maine, California and Nevada. Meanwhile, medical marijuana use is on the ballot in Arizona, Florida and North Dakota. Notably, if voters approve recreational use, 25% of the U.S. population will be living in states where recreational marijuana use is legal, up from 5% currently.

This brings us back to an extensive research report done by Cowen Research in September. In it, the firm said they see a path to a $50 billion recreational market by 2026. This would suggests a meaningful 9x increase in 10 years.

Cowen highlighted the following sector expected to be impacted:

Consumer Staples: Risk to Alcohol, Opportunity for Tobacco

"In the near term, we believe KSHB represents the best opportunity to capitalize on the growing cannabis industry, via the company's distribution and manufacturing of packaging solutions for legal cannabis enterprises. We are watchful of substitution with alcohol, as incidence among men in the U.S. has fallen 10 bps in the last 5 years (while cannabis incidence has risen 260 bps). Declines in male alcohol consumption put beer and spirits most at risk, though Mexican beer looks to be an exception as cannabis use materially under-indexes among Hispanics. Longer term, we believe U.S. tobacco is well positioned to realize meaningfully faster top-line growth from exposure to cannabis, which we think the industry will explore via their e-vapor prowess (upon federal legalization). "

The firm sees this as positive for Kush Bottles, Inc. (OTC: KSHB), Constellation Brands (NYSE: STZ), Reynolds American (NYSE: RAI), and Altria Group (NYSE: MO) and negative for Molson Coors Brewing (NYSE: TAP) and Brown-Forman (NYSE: BF-B)

Consumer Discretionary: Evolving Distribution Model with Ample Growth

"Given the local nature of legal cannabis businesses today, the retail landscape remains highly fragmented, though there are signs of consolidation at the state level. With more cannabis dispensaries in CO than Starbucks, assuming full legalization, we estimate there could be as many as ~17,000 legal cannabis retailers in the U.S., upon full legalization. While consumers can certainly visit these brick-and-mortar locations, we have already seen a delivery model flourish in California (addressing the legal medical market); given the stigma around cannabis, this more discreet model leverages well existing Internet delivery models. The potential for recreational legalization in this market holds good potential for both these delivery businesses, as well as fast food retailers that over-index to the state."

The firm sees this as positive for Jack in the Box (NASDAQ: JACK)

Regulation: Key Gating Factor

Our $50 bn recreational market estimate assumes federal legalization. November ballot initiatives could be a key catalyst, as 5 states consider legalizing recreational cannabis, while another 4 states consider medical marijuana. We ascribe an 80% probability that CA voters approve recreational cannabis, which we believe would triple the size of the legal market, as there are ~30 mm adults in that state alone. With over 50% popular support for cannabis legalization (and over 70% support among millennials), voter momentum will likely ultimately spur action at the federal level.

Health Care: Long-Term Potential

"While DEA scheduling and FDA approvals make therapeutic and pharmaceutical applications a longer term opportunity in cannabis, early data seems promising. Research suggests that cannabis can be an effective substitute for opioids, in particular for cancer-related pain, though it is unlikely to disrupt the broader pain market given that a vast majority of opioids are low-cost generics. Meanwhile, cannabinoid-based biopharmaceuticals have shown promise in the treatment of a number of conditions, including refractory epilepsy. Across the board, as these formulations continue to be developed and tested, cannabis safety and quality testing will become increasingly important (including for recreational cannabis), and we conservatively estimate the cannabis testing market could represent a ~$100 to $500 mm opportunity for life science tools companies over time."

The firm sees this positive for GW Pharma (NASDAQ: GWPH), Agilent Technologies (NYSE: A), Bruker (NASDAQ: BRKR), Danaher (NYSE: DHR), Illumina (NASDAQ: ILMN), PerkinElmer (NYSE: PKI), Qiagen (NASDAQ: QGEN), Thermo Fisher Scientific (NYSE: TMO), Waters Corp. (NYSE: WAT).

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