Canada: Major Businesses That May Benefit After Canada Legalizes Recreational Marijuana
Written By Conrad Schickedanz
Canada’s Majority Liberal Government intends to introduce legislation in Spring 2017 to legalize recreational marijuana.
For investors who do not want to invest directly in marijuana producers, other currently profitable, major companies may profit from such legislation.
Based on Colorado’s experience, companies that may benefit may sell travel services or deliver pizzas.
Canada’s drug stores reportedly want a role in retail marijuana sales.
If Canadian drug stores sell the product, will Wal-Mart and Costco participate, and if so, will that affect legalization in America?
In October 2015, Canadians elected the Liberal Party of Canada and their leader, Justin Trudeau, as the majority government and Prime Minister, respectively. A campaign promise of Prime Minister Trudeau was to legalize and regulate the use of recreational marijuana in Canada.
Medical marijuana was and still is legal in Canada nationwide (with the proper prescription). Unlike the United States, Canada’s Criminal Code is federal legislation.
Canada’s Health Minister reportedly told the UN General Assembly that Canada’s Liberal majority government intends to introduce legislation inspring 2017 legalizing marijuana for recreational use.
In a parliamentary system, this will have to be debated. Presumably, part of that debate will be a timeline as to when legalization will occur.
It is unknown what kind of legislation will emerge. The Liberal government has indicated that it intends to tax and regulate the industry, with goals of keeping the drug out of the hands of children, and profits out of the hands of criminals.
This has led to speculation as to which companies will directly benefit, ranging from current legal medical marijuana producers, illegal dispensaries, pharmaceutical companies, tobacco companies, or maybe other players.
While Some Investors May Want To Speculate On The Above Issue, There Are Other Companies That May Make Money Following Marijuana Legalization
Risk-averse investors who believe that marijuana will be legalized in Canada may be able to make money by investing in existing profitable companies that have nothing directly to do with producing marijuana.
While the gains in investing in a derivative play may not reap the massive rewards that investors in a legal medical producer, for example, may want, investing in proven companies creates what some readers may find to be a better risk/reward ratio.
Investing in a proven company may continue to be profitable even if marijuana is not legalized.
So let’s look at some companies that may benefit from legalized marijuana… and let’s do what the politicians are doing – study the impact of legalization elsewhere – namely Colorado, which legalized pot in 2014 (despite remaining illegal federally)…
Peyton Manning’s Pizza Sales Comments To Sports Illustrated Following Marijuana Legalization
In 2013, prior to marijuana legalization in Colorado, TMZ reported that it called up 21 Papa John’s (NASDAQ:PZZA) locations that Denver Broncos star Peyton Manning (who has since retired from the NFL) had bought in the Denver Area. Sales has climbed significantly, with one store reporting an increase in sales of 25 percent. Remember this is before legalization. After legalization, Manning told Sports Illustrated:
“There’s some different laws out here in Colorado. Pizza business is pretty good out here, believe it or not, due to some recent law changes.”
The media assumed he was implying marijuana legalization improved pizza sales. As Papa John’s is a public company, we can look at its SEC filings and try to further speculate whether marijuana did just that.
Papa John’s owns a lot of joint-venture stores in four states, including Colorado. So while we cannot get Colorado-specific numbers from the filing, we can look at how that group of four states did after marijuana legalization and compare it to the company as a whole.
In the company’s 10-K for the year ended December 28, 2014, the company gave a breakdown of its joint venture stores in four regions, including Colorado.
o, total store count in these regions grew by 9, whereas income before income taxes rose 32 percent. In comparison, the total global company income before income taxes rose 7.6 percent from $106 million to $114 million. Remember, these are the numbers after marijuana legalization – but of course, correlation in no way is proof of causation.
Whether marijuana use in Colorado contributed to Papa John’s gains in a group of locations of which Colorado represented just 12.5% is highly speculative. I leave it to readers to speculate whether this made any difference, but this was the only publicly available relevant information I was able to find to try to quantify the implication in Peyton Manning’s comment. I readily admit an obvious factor in increased sales may have been Manning’s popularity in the state.
Further, it is worth noting that studies cited by the Guardian indicate that following legalization the use of pot among children did not rise, but the use among adults did rise about five percent.
Who May Benefit From Increased Pizza Consumption In Canada?
Pizza Pizza Royalty Corp. (OTC:PZRIF) is the owner of the “Pizza Pizza” trademark. The name is licensed to another company, Pizza Pizza Limited for use by restaurants in a royalty pool. Those restaurants pay a royalty fee of six percent for the use of the Pizza Pizza name. Other restaurants in the pool pay a royalty of 9 percent for the use of the “Pizza 73” name. At the end of the most recent quarter, September 30, 2016, there were 736 restaurants in the pool.
The company pays a monthly dividend of $0.0713 (Canadian) per share. This works out on an annualized basis to about $0.86 (Cdn) or 5.4 percent per year based on the company’s closing price of $15.84 on November 15, 2016. (All amounts quoted are for the Toronto-listed stock, not the over-the-counter stock.)
Pizza Pizza is probably so well-known in Canada due to its pre-smartphone, pre-cities-with-multiple-area-codes advertising campaigns using a jingle that made it easy to recall its phone numbers ending in the digits 11-11.
If you believe that marijuana sales may increase pizza delivery orders in Canada, this is a company that many Canadians will remember how to order from, even if they are under the influence of any legal substance.
Will Legalization Increase Tourism To Canada?
According to a study cited by the Denver Post, tourism dollars spent in Colorado increased 4.5 percent in 2014. The article also noted that tourism had been increasing prior to legalization. The article also cited a research report cited by the Colorado Tourism Office that suggested legalized marijuana was likely to attract a slightly lower percentage of visitors than it would discourage from visiting, having no net effect (or implying a slight negative effect).
As polls have proven unreliable in recent American and British elections, I am going to assume the fact that tourism did not decrease indicates that the poll may not be reliable. Further, it’s common sense that an area without prohibition is going to draw tourists from neighboring areas with prohibition.
Canada has two major airlines: Air Canada (OTCQX:ACDVF) and WestJet(OTC:WJAFF). It also has charter airlines that fly to Europe and sun-destinations, but for the purposes of this article, I am interested in airlines that cater to American and international travelers who may want to visit Canada.
WestJet has code shares with American Airlines (NASDAQ:AAL) and Air Canada is part of the Star Alliance, which includes United Airlines (NYSE:UAL). As an investment, I prefer WestJet because Air Canadareportedly hedges fuel prices whereas WestJet reportedly does not. That WestJet investment preference is based on my belief that oil prices are in a long-term downward trend, as I have written in prior support of my belief American Airlines will do well in the future.
Further, WestJet is mainly a North American airline, whereas Air Canada is a global airline, so investors who believe nationwide, legal recreational marijuana may increase tourism may want to weigh whether tourism is more likely to increase from abroad or the United States.
Drug Stores Want In On The Retail Sales
According to MacLeans, drug stores in Canada have indicated a desire to sell recreational marijuana. To put this in perspective for American readers, until recently, in the Province of Ontario, alcohol was only available in government-owned liquor stores, beer-conglomerate owned “Beer Stores,” licensed establishments, some wine stores, and other inconvenient locations. In other words, alcohol was not readily available in grocery, convenience, or superstores. That has since changed with beer and wine available in some grocery stores.
Canada’s largest drug store chain is Shoppers Drug Mart, which is a brand ofLoblaw Companies Limited (OTCPK:LBLCF). Shoppers operates about 1,300 locations across the country, according to the company (at the time of writing this article). Loblaw also has pharmacies in many of its grocery and superstores.
While Ontario’s government-run liquor stores, aka, the “LBCO,” wants to sell recreational marijuana when legalized, it makes sense, that as marijuana is currently legal in Canada for medicinal purposes, that a drug store would be a more logical choice to sell the product. Pharmacy staff may be better equipped than liquor store employees (who are very knowledgeable about selecting the right wine) to assist customers who are considering purchasing the drug for recreational or medicinal purposes.
As I have written over the years on this site, Loblaw and its controlling Weston family are strong retailers, who I believe were able to knock Target (NYSE:TGT) out of Canada. As Canada maps out its plan to legalize recreational marijuana, I anticipate Loblaw will fight to get the product in its stores, just as it has fought to get beer and wine in its stores.
Of interest is whether American-owned competitors such as Wal-Mart(NYSE:WMT) and Costco (NASDAQ:COST) will also try to get the product in their pharmacies/stores given the product is not federally legal in the United States. If not, this may be a competitive advantage to Loblaw, should legislation result in marijuana being sold in drug stores or stores with pharmacies.
Alternatively, if Wal-Mart and Costco do get involved in the business in Canada once it is legalized (presuming the current Liberal government keeps its campaign promise), I will leave it to readers to speculate as to what the impact, if any, on potential legalization in America may be. This may especially be interesting to observe as Costco is based in Washington, a state that has already legalized recreational marijuana, despite it being illegal federally.
Loblaw reported adjusted net earnings per share this morning, November 16, 2016 of $1.26, an increase of 28.6% compared to the same quarter last year.
Source: Seeking Alpha
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