Distinguished Speaker Series: Vivien Azer, Cowen & Co.

Cowen’s Views on Cannabis

On July 9, Vivien Azer, the analyst responsible for covering cannabis at Cowen & Co., presented her views at CFA Society Chicago’s Distinguished Speaker Series luncheon at the University Club. Cannabis/Hemp/CBD is an “emerging” sector within the U.S. and Canadian stock markets as legalization of the formerly stigmatized substances has begun to change.

Azer concluded that the “relative size of mature Consumer Products Group (CPG) categories reflects a long runway for growth in cannabis”. The global size of the alcoholic beverage market is $1.3 trillion, the NARTD (non-alcoholic ready-to-drink) market is $1.2 trillion in size with traditional tobacco being $800 billion, while the currently “illicit” cannabis market is estimated at $150 – $200 billion in size.

Azer started coverage at Cowen & Co. in September of 2016 and the two questions she asked before starting to examine the sector were: 1) Can Cowen make investors’ money covering cannabis; and, 2) Can Cowen make companies money (presumably bringing private companies public) covering the sector?

The Disruptees:

Within the Consumer Products Group (CPG), there are 4 distinct verticals:

  • Adult Use which includes breweries like BUD, Heineken and Molson (TAP)
  • Beauty & Nutraceuticals which encompasses Coca-Cola (KO), Pepsi (PEP) and cosmetic companies like Estee Lauder (EL)
  • OTC Pain / Sleep, which is primarily Johnson & Johnson (JNJ) and Procter & Gamble (PG)
  • Traditional pharmaceuticals like Merck (MRK), Eli Lilly (LLY), and AstraZeneca (AZN)

Azer noted that both Constellation Brands and BUD had either made investments in the cannabis space already or were interested since the traditional breweries and alcoholic brands were likely to be disrupted from cannabis as consumers see it as a psychoactive substitute.

Don’t forget Canada (The Great White North, eh?)

Azer and Cowen believe that cannabis represents a $12 billion market opportunity in Canada by 2025 with retail accounting for the bulk of the sales. One slide showed the monthly progression of Canadian retail sales in cannabis from October 2018 to March 2019 which cumulatively represented $300 mm (CAD) in retail sales. Cowen seems to see Canada as an early leading indicator of U.S. retail sales since Canada seems so far ahead of the U.S. in terms of its retail rollout. The early retail sales adopters in terms of Canadian provinces are Alberta, Ontario, Quebec and Nova Scotia with each having 24%, 23%, 13% and 8% respectively of Canadian cannabis sales. Alberta has 13% of Canada’s population but 24% of Canada’s total cannabis sales given early bricks-and-mortar adoption.

United States:  

At the time of the lunch, 11 states and District of Columbus had legalized cannabis for adult use. Colorado was the earliest adopter in terms of retail sales but their sales slowed when California and Nevada legalized adult use of cannabis. Cowen estimates that 80% of the $50 billion cannabis market in the U.S. is currently “illicit”.  By Q1 ’19, five states had generated roughly $5 billion in cannabis revenue and those were Colorado, Washington, Oregon, Nevada and California. Cannabis use has clearly come at the expense of alcohol.

Here are the numbers Cowen published as market sizes for various aspects of the cannabis market:

  • THC is an $80 billion opportunity by 2030
  • CBD is a $16 billion revenue opportunity in the U.S. by 2025

Vivien Azer of Cowen did a great job outlining market opportunities and the “macro” of the cannabis/THC/ Hemp/CBD markets. Canada is an interesting comparison since it appears to be out in front of the retail rollout experience. During Q&A, Azer touched on the SAFE Banking Act which will insure access to financial services for cannabis-related businesses. Since the lunch, the House has passed the SAFE Banking Act, but it still hasn’t been passed in the Senate, although passage is ultimately expected.

If you were unable to attend this event but want to learn more about the cannabis industry and where it’s headed, be sure to join us at our next cannabis event hosted by our Education Advisory Group at the beginning of 2020. Information available on the CFA Society Chicago website soon!

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