r/valueinvesting
Finding value where others aren't looking - Auxly Cannabis
Auxly Cannabis is a deep value play trading at 6x FCF with strong revenue growth, expanding margins, and insider buying.
- Trading at an attractive valuation of approximately 6x free cash flow with a $270M market cap.
- Strong operational growth: Q1 revenue up 22% YoY and operating cash flow up 102% YoY.
- Expanding profitability with EBITDA margins reaching 31% and gross margins expanding to 55%, alongside CEO stock purchases.
Ticker in Canada is XLY.TO
USA is CBWTF
All numbers in CAD
I've been invested in Auxly Cannabis for the last couple years with a current average cost basis of $0.11. Like many other Cannabis stocks, Auxly went public pre revenue and the market eventually caught up with it. After some convertible debt and a bunch of dilution, the company managed to survive.
It is now thriving. The CEO has been buying stock all year and has only upped his purchases more recently.
Why is it a value play: I'm predicting $45mm in Owners Earnings, a metric popularized by Buffet - this is FCF + maintenance capex) from what is currently a $270m market cap. I believe the business is currently trading at approx 6x FCF. If you had $270m right now and chose to buy all of Auxly, you would be paid $45mm in year 1 (assuming you don't want to expand ofc) This, imo, is what value investing is all about.
I asked our beloved friend, Chat GPT, to summarize some recent operational highlights:
\ Auxly generated \\$11.3M of operating cash flow before working capital changes in Q1 2026\\, up \\102% YoY\\*, despite having a market capitalization that remains well under C$300M. The company is producing cash at a rate that looks disconnected from its valuation.
\ Revenue grew \\22% YoY to $39.8M\\* in Q1 2026. This isn't a deep-value turnaround story with stagnant sales; the company is simultaneously growing and generating cash.
\ Adjusted EBITDA increased \\65% YoY to $12.3M\\, reaching a \\31% EBITDA margin\\*. Few cannabis companies are producing margins at this level while still growing revenue above market rates.
\ Gross margin on finished cannabis inventory sold expanded from \\48% to 55%\\* year-over-year. Margin expansion alongside revenue growth suggests operating improvements rather than growth being purchased through discounting.
\ Operating cash flow represented \\92% conversion of EBITDA\\* in Q1 2026. The earnings are translating into cash rather than being trapped in working capital or accounting adjustments.
\ Cash increased to \\$42.7M\\ at quarter-end while debt fell to approximately \\$45.0M\\*, leaving the company close to a net-cash position.
\ Total debt is now only \\0.9x trailing-twelve-month Adjusted EBITDA\\*, a leverage ratio that would be considered conservative in most industries
\ The company generated \\$38.6M of operating cash flow before working capital changes during FY2025\\, followed immediately by another \\$11.3M in Q1 2026\\*, indicating that the cash generation is not a one-quarter anomaly.
\ Auxly has now reached the point where management has authorized a share repurchase program of up to \\68.9 million shares\\*, an unusual position for a cannabis company in a sector where most peers have historically relied on dilution.
\ Back Forty remains the \\#1 cannabis brand in Canada\\*, giving Auxly a competitive position that appears stronger than its market capitalization would imply.
\ Management stated that Q1 2026 produced seasonal records for \\revenue, EBITDA, and operating cash flow\\*, despite Q1 typically being one of the weaker quarters for cannabis sales.
\ Revenue grew \\22%\\ while the overall Canadian recreational cannabis market reportedly grew only around \\2%\\*, implying substantial market-share gains.
\* Interest expense was cut nearly in half from the prior year as the balance sheet improved, allowing more operating profits to reach shareholders.
\ The company finished Q1 with \\$60M+ of net working capital\\*, giving it flexibility to invest in growth initiatives without relying on external financing
\ Unlike many cannabis companies that have chosen growth at any cost, Auxly is currently demonstrating \\*double-digit revenue growth, 30%+ EBITDA margins, positive net income, significant operating cash flow generation, and a strengthening balance sheet at the same time.
\ If annualized, Q1's \\$11.3M operating cash flow\\ implies a run-rate of roughly \\$45M+ per year\\*, which is a substantial percentage of the company's current equity value. Even allowing for seasonality and future investment spending, the implied cash-flow yield appears unusually high.
NOOOOOOOOOOOO NEVER NEVER NEVER GOING TO TOUCH WEED STOCK
FAR FAR AND FAR AWY FROM ME
I'm the same way with pharma. I just find this a lot easier to understand and evaluate.
I’ve been watching Auxly. I’m currently waiting for a check to clear the bank (2-5 days) so I can invest $10k in Auxly for the long haul. Today would’ve been the perfect opportunity to jump in. Hopefully it continues to go down 🤣. I also like High Tide I plan to invest $500 monthly with them for the long haul as well.
This looks potentially good, any idea why the forward PE is so much higher than trailing, market over worried or is there some reason to suspect earnings will slow?
There was a deferred tax recovery that boosted accounting income last year.
Generally speaking, accounting income isn't a great metric to look at for cannabis companies because there are significantly more non-cash items that can distort it. Ex: Cannabis companies, under IFRS, makes fair value adjustments on plants (bio assets) while they're growing and then recognize these hypothetical gains or losses before they're sold.
Many of the companies like to use EBITDA to adjust for non cash items but I prefer to just use cash from operations, owners earnings, or FCF. When evaluating a business, I want to know how much money it would actually put back into my pocket. Accounting earnings distort that number, especially when it comes to cannabis.
Yeah it looks quite promising, maybe a Peter Lynch classic. Do you have any concerns?
I can't say that I have any real current concerns, but I can mention some that I had in the past that were recently cleared up. That might give you an idea of what I'm paying attention to.
1) Capacity: Until the last couple months, I wasn't exactly sure how much more capacity they had within their current footprint before major capex would be required to grow. The CEO recently clarified that they believe they're able to increase output by more than 50% in the current footprint. They also have a lot more space available on the land (that they own, unlike many others), so they always have the option when necessary.
2) Can they grow new brands organically? Their flagship brand, Back Forty, is crushing it and making incremental gains as they slowly push out new products (new flower strain and new pre-rolls format releasing atm), but can they grow other brands? Well, late last year they created a new, more premium brand called South Point, to test the waters. Is been very y successful. Last week I saw that some data points have it showing as having entered the top ten best selling 3.5g (1/8 ounce) skus in Ontario (largest market by far)
They're very calculated with new product offerings and don't flood the market. That's fairly unique in the industry, but its a massive benefit when it comes to consistency and efficiency.
3) Where do they go after winning in Canada? While they're still making great incremental gains in Canada with new product releases and the recent release of South Point, they also recently started test shipments to the UK as a medical provider and are currently building out the processing capacity that's required to expand internationally. They're 20% owned by Imperial Brands, the tobacco company, and they're committed to helping with international expansion. I know some people have moral issues with tobacco involvement, but the pre-roll technology that IB helped with is one of (many of ) the reasons why Auxly's gross margins are so much better than everyone else's
Someone should fix their website
https://www.myforay.com
https://hibuddy.ca/products/brand?q=FORAY
This is an older brand that they barely sell under anymore
https://www.b40cannabis.com/
This is their flagship brand that makes up most of sales.
That’s a very fun way of investing, I was wanting to get more exposure to the microcaps with the biggest growth potential but didn’t know how to find them so much, thanks for that.
I’m currently in novo nordisk which is set to have a big boost in earnings with their recent expansion into the UK (where I’m from) strong take up of their new oral semaglutide. Probably my current highest conviction investment