Is Tilray Brands (TLRY) a Possible Buy Opportunity Before Earnings?

The Leamington, Canada-based Tilray Brands, Inc. (TLRY) is expected to release its first quarter results on October 4. For the quarter ended August 31, 2023, TLRY’s EPS is expected to remain negative. Its revenue is expected to increase 13.8% year-over-year to $174.30 million.

In this piece, I have discussed several reasons why it could be wise to avoid TLRY now.

For the fiscal year ending May 31, 2024, TLRY forecasted its adjusted EBITDA to come between $68 million and $78 million, representing 11% to 27% year-over-year growth. The company expects to generate positive adjusted free cash flow.

TLRY has been on an acquisition spree of late as it announced that it had closed its all-cash previously-announced acquisition of eight beer and beverage brands from Anheuser-Busch InBev SA/NV (BUD), including the breweries and brewpubs associated with them on October 2.

Earlier in August, TLRY announced the acquisition of the remaining 57.5% equity ownership of Truss Beverage Co. from Molson Coors Canada. The acquisition is expected to strengthen its leadership in the cannabis market in Canada. These acquisitions are efforts to diversify its offerings across the beverages sector. However, federal cannabis legalization in the United States still looks distant.

The Department of Health and Human Services (HHS) recently recommended that the U.S. Drug Enforcement Administration reclassify cannabis from a Schedule I designation to a Schedule III controlled substance under U.S. law.

If the DEA reschedules cannabis from Schedule I to Schedule III designation, it would legalize cannabis on a federal level for regulated medical use. However, how beneficial it would turn out for TLRY remains to be seen as medical cannabis would likely become an FDA-approved pharma product requiring strict production, packaging, labeling, distribution, and prescribing procedures.

On September 18, 2023, short seller Kerrisdale Capital released a report on TLRY describing the company as a “failing cannabis player.” The report said that the company was running a “familiar playbook for unsuccessful businesses trading in the public markets.”

TLRY’s stock has declined 24.9% over the past month and 18.6% over the past year to close the last trading session at $2.27.

Here’s what could influence TLRY’s performance in the upcoming months:

Mixed Financials

TLRY’s total net revenue for the fiscal fourth quarter ended May 31, 2023, increased 20.1% year-over-year to $184.19 million. Its adjusted gross profit rose 35.5% over the prior-year quarter to $68.42 million. The company’s adjusted EBITDA increased 93.2% year-over-year to $22.23 million. Also, its adjusted net loss narrowed 29.8% year-over-year to $32.42 million.

For the fiscal year ended May 31, 2023, TLRY’s total net revenue declined 0.2% year-over-year to $627.12 million. Its adjusted gross profit increased 11% year-over-year to $206.44 million. The company’s adjusted EBITDA rose 28% over the prior year period to $61.48 million. In addition, its adjusted net loss narrowed 29.2% year-over-year to $129.55 million. Also, its adjusted net loss per share narrowed 44.7% year-over-year to $0.21.

Mixed Analyst Estimates

TLRY’s fiscal 2024 and 2025 revenue are expected to increase 14.4% and 8.3% year-over-year to $717.34 million and $777.17 million, respectively. Its EPS for fiscal 2024 and 2025 are expected to remain negative.

Poor Profitability

TLRY’s 24.15% trailing-12-month gross profit margin is 56.6% lower than the 55.67% industry average. Likewise, its 3.32% trailing-12-month CAPEX/Sales is 26.3% lower than the 4.50% industry average. Furthermore, the stock’s 0.13x trailing-12-month asset turnover ratio is 66% lower than the industry average of 0.38x.

POWR Ratings Reflect Bleak Prospects

TLRY has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TLRY has a D grade for Stability, in sync with its 2.44 beta. Its poor profitability justifies its D grade for Quality.

TLRY is ranked #154 out of 161 stocks in the Medical - Pharmaceuticals industry. Click here to access TLRY’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

TLRY has been foraying into beverages lately to drive its growth. It is betting on the legalization of cannabis in the United States to sell medical cannabis and to introduce drinks infused with THC and CBD. However, the federal legalization of cannabis is still some time away. Companies that depend on government regulations to conduct business are often not attractive bets for investors.

Considering its dependence on government regulations, poor profitability, and high beta, it could be wise to avoid the stock now.

Stocks to Consider Instead of Tilray Brands, Inc. (TLRY)

The odds of TLRY outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these stocks with A (Strong Buy) or B (Buy) ratings from the Medical - Pharmaceuticals industry instead:

Novartis AG (NVS)

Novo Nordisk A/S (NVO)

Zoetis Inc. (ZTS)

What To Do Next?

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TLRY shares were trading at $2.28 per share on Tuesday afternoon, up $0.01 (+0.44%). Year-to-date, TLRY has declined -15.24%, versus a 11.66% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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