Ancillary Companies & the Cannabis Industry
Licensed producers and multi-state operators are key players in cultivating high-grade cannabis crops, however, ancillary companies are equally important as they provide vital services that allow grow operations to run smoothly. Which are some of the top ancillary cannabis stocks to watch in 2022? Find out more in this article.
It takes a good deal of resources and management to grow healthy cannabis plants, especially for extensive operations. A cannabis operator may need the services of real estate investment trusts (REITs) to lease greenhouses, producers of plant foods to nourish crops, tech companies to install essential equipment such as grow lights or hydroponic settings, or packaging companies that supply safe containers for flower, edibles or other canna-goods. These different businesses comprise the ancillary segment of the cannabis industry, which has grown on par with the spreading legalization of cannabis.
Between 2019 and 2020, the legal cannabis sector nearly doubled in size and value. In 2020, the cannabis industry broke records with a revenue figure of $20 billion; in 2021, this figure will likely surpass $26 billion.
Up to 10 ancillary businesses support each licensed cannabis operator on average, ranging from landlords, accountants, fertilizer suppliers, packaging suppliers, renting technologies, etc. From the point of view of an investor, ancillary businesses may present an exciting opportunity.
The number of ancillary companies supporting the cannabis industry is growing in every state with some form of cannabis regulation. It doesn't have to be a fully legal market, with set laws on both medical and recreational use of cannabis. Even if production, sales or distribution are limited to medical products, ancillary businesses likely support cannabis-related operations.
Below is an overview of some of the most interesting ancillary businesses that support the cannabis sector.
Ancillary cannabis stocks to watch in 2022
This is far from an exhaustive list of ancillary providers to the cannabis sector to watch in the next 12 months. Still, the four companies selected here — Greenlane, Innovative Industrial Properties, GrowGeneration, and Scotts Miracle-Gro — are some of the most formidable players at the moment.
Greenlane
Greenlane is one of the industry's leading ancillary cannabis companies, earlier this year completing a merger with KushCo, another early pioneer in the cannabis sector noted for selling packaging, containers, and other ancillary products. KushCo and Greenlane became a combined company last summer and are now operating as Greenlane.
Greenlane has established itself as one of the largest global sellers of premium cannabis accessories, child-resistant packaging, and specialty vaporization products.
Greenlane's total revenue jumped 16% to $41.3 million for the third quarter of 2021, following the transformational merger with KushCo. Sales of Greenlane Brands grew to $8.4 million during the same quarter, up 26% compared to $6.7 million in sales during the same quarter in 2020. Greenlane also recently sealed a deal to acquire industry-leading vaporizer brand DaVinci.
Innovative Industrial Properties
Investors have likened Innovative Industrial Properties, a real estate investment trust (REIT), to a cannabis stock that keeps on giving. Innovative Industrial Properties specializes in leasing industrial space to medical marijuana operators.
The company uses a sale-leaseback structure to lease industrial space to medical marijuana producers. As of December 14, 2021, the company owns 103 properties comprising an aggregate of approximately 7.7 million rentable square feet in most legal states around the U.S., including California, Colorado, Arizona, Illinois, New York, New Jersey, Virginia, etc.
That Innovative Industrial Properties is one of the most remarkable REITs out there speaks the fact the company has grown six times in the last five years. When the company held its initial public offering in late 2016, it didn't own a single property.
The leasing giant will continue to grow in the future, that's for sure. And so will other players in the REIT segment. REIT is up 60% over the past year, over 400% in the last three years, and an astonishing 1,200% over the past five years.
GrowGeneration
The big player in retail hydroponic and organic gardening stores in the United States, GrowGeneration Corp., is present in 12 legal states, operating 62 stores in total. Most of these shops, 24, are in California. Grow Generation also has an online e-commerce shop.
The company markets and distributes horticultural and organics as well as grow lights, lighting fixtures, grow media, grow systems, fans, humidifiers, nutrients, and other tools and instruments mandated for successful growing of crops.
One of the most remarkable things about GrowGeneration is that it's a small company with a market cap of $804 million. But thanks to its subsidiaries, it has established a remarkable presence in some of the most successful legal states.
In the first nine months of 2021, GrowGeneration almost tripled its revenue to $332 million from the $131 million in the same period last year. Its net profits climbed to $16.9 million ending September 30, compared to $3.8 million on September 30, 2020. The company plans to open between 15 and 20 new locations in 2022, and it will further boost revenue from its recent acquisition of Washington's Hoagtech Hydroponics.
Scotts Miracle-Gro
Scotts Miracle-Gro was already well-positioned to enter as an ancillary provider when the legal cannabis sector appeared. This is an old Ohio-based company that started selling lawn seed in 1868. That's quite a while ago!
Scotts Miracle-Gro is a trusted brand that serves growers as well as mass merchandisers, warehouse clubs, nurseries, garden centers, food and drug stores, etc. The Ohio company provides products such as lawn fertilizers, grass seed products, pesticides, and gardening and landscape products like plant foods, potting mixes, and garden soils. The company also offers hydroponic products to grow plants using little or no soil. For the year ended September 30, 2021, company-wide sales increased 19 percent to a record $4.93 billion, compared with $4.13 billion a year earlier. Sales figures are likely to continue to reach new highs for Scotts Miracle-Gro in 2022.
The growth of the cannabis industry is influencing the growth of ancillary services such as Scotts Miracle-Gro and many others.
Ancillary companies supporting the cannabis sector are worth the attention of any investor who is keen to engage in a segment that does not necessarily deal directly with growing cannabis. These companies are at the same time interesting for every business person who follows the growth of the cannabis industry and how the sector is setting the trends of tomorrow.
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Stephen Andrews
