MariMed Under Section 280E: A Detailed Look at Tax Effects and Stock Valuation

By Bill McNarland On Jan 11, 2024

The TDR Three Key Takeaways:

Section 280E significantly affects cannabis companies like MariMed by preventing them from deducting standard business expenses, leading to a higher effective tax rate.
MariMed’s analysis suggests an overpayment of approximately $4.8M USD in taxes, which, when recalculated with the S&P 500 earnings multiple, could increase its stock value from $0.28 USD to $0.62 USD per share.
The fair value analysis, including the impact of Section 280E, indicates a potential rise in MariMed’s stock valuation to $0.95 USD per share, representing a substantial upside of 239%.

Earlier this week we started launching articles looking at the impact of 280E on Cannabis companies, we started with an analysis on TerrAscend. Exploring the impact of Section 280E on cannabis companies like MariMed reveals significant financial implications. Section 280E, part of the U.S. Internal Revenue Code, prevents cannabis businesses from deducting standard business expenses due to their classification under Schedule I or II controlled substances. This results in a higher effective tax rate for these companies.

Focusing on MariMed, their Earnings Before Tax (EBT) over the last twelve months, including unusual items, is $7.45M USD. For our analysis, we apply a median corporate tax rate of 28%. This calculation suggests MariMed has overpaid taxes by approximately $4.8M USD in the past year.

When I evaluate MariMed’s stock value, this overpayment impacts its valuation. Using the current S&P 500 earnings multiple of 26.37 times earnings, and dividing by the number of outstanding shares, we estimate an additional value of $0.34 USD per share. Therefore, MariMed’s stock, currently at $0.28 USD per share, could potentially increase to $0.62 USD, or $0.82 CAD per share.

I conducted a fair value analysis, incorporating analyst targets, discounted cash flow, and peer evaluations, along with the 280E analysis, further informing the valuation. The current stock value is $0.28 USD, with analyst targets around $0.76 USD. Combining discounted cash flow and peer evaluations gives a pre-280E valuation of $0.61 USD. This reflects a 118% potential upside. Including the $0.34 USD per share from the 280E impact, the post-280E valuation could rise to $0.95 USD, indicating a 239% potential upside.

This analysis clearly demonstrates the substantial effect of Section 280E on MariMed’s financial position and stock valuation, highlighting the potential for significant changes in company valuation if there are reforms to this tax policy.