Trulieve: This Cannabis Stock Is A Buy On Its Growth Potential (TCNNF)

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Almost two years ago I wrote an article for Seeking Alpha titled: Trulieve: Cannabis Best in Class. Since that time, Trulieve (OTCQX:TCNNF) shares have gone up 66%, compared to a 49% gain in the S&P 500. Yes, the company outperformed the S&P, and yes, it shows that it’s possible to make a profit investing in cannabis. In this article I will demonstrate that Trulieve is an even better investment now than it was back then, and why it should be a major holding in every cannabis portfolio.

Trulieve the Company

Trulieve was in the first small group of licensees after Florida passed a law expanding access to medical marijuana in 2016. In a recent interview, CEO Kim Rivers described the company’s early days like this: “When we really started five short years prior, I wasn’t taking a salary and I was in the back making capsules and ensuring that shipments went out on time.” In the first full year of operation, they had sales of $19.8 million, operating income of $9.9 million, and net income of $3.6 million. They have consistently grown every year, so that in the trailing twelve months sales were $801.5 million, operating income of $300.8 million, and net income of $92.6 million. This is growth of 4,045%, 3,038%, and 2,572% respectively. According to SA analyst estimates 2022 revenue will grow 55% and EPS 26%. The difference in revenue and EPS growth is due to the large amount of capital required for their active expansion program. For data geeks, here are the historical numbers:

2017 2018 2019 2020 TTM
Revenue 19.8 102.8 252.6 521.5 801.5
Operating Inc 9.9 35.1 113.3 223.1 300.8
Net Income 3.6 10.9 53.1 63.1 92.6
EPS 0.05 0.11 0.46 0.53 0.71
EBITDA 10.5 38.2 126.4 247.2 342.6

Source: Seeking Alpha. All data in $millions except EPS.

Initially, critics said that Trulieve was severely limited by its presence in only one state, Florida. They said Trulieve was too slow expanding geographically, that their Florida success was idiosyncratic and maybe not repeatable elsewhere. In three years they have expanded into eleven states. The proportion of stores outside Florida is 31% and growing.

Best in Class

Two years ago I declared Trulieve Best In Class in cannabis, and in a comparison with cannabis peers it’s still true. The table below shows what percentage of trailing twelve month revenue drops down to various income lines, compared to peers. The peers are Green Thumb (OTCQX:GTBIF), Verano (OTCQX:VRNOF), Curaleaf (OTCPK:CURLF), and Columbia Care (OTCQX:CCHWF).

Revenue Gross Profit Operating Income Net Income EBITDA
Trulieve 801.5 69.1% 37.5% 11.6% 42.7%
Peer Avg 775.2 60.4% 25.6% 8.5% 31.7%

Source: Seeking Alpha. Revenue in $million

Looking closer gives a more granular picture. The only company superior to Trulieve on some metrics is Verano, on which I recently wrote very positively.

Revenue Gross Profit Operating Inc Net Income EPS EBITDA
Trulieve 801.5 553.6 300.8 92.6 0.76 342.6
Green Thumb 893.6 491.9 271.6 86.4 0.34 296.1
Verano 600.5 499.7 356.8 186.6 0.59 378.1
Curaleaf 1209.7 687.6 175.6 109.1 -0.15 273.2
Columbia Care 396.9 193.7 -10.3 -117.4 -0.39 34.1

Source: Seeking Alpha. All data in $millions except EPS.

Future Performance Drivers

The most important driver is Trulieve’s positive cash flow and consistent profitability, even if these metrics are somewhat lumpy because of expansion capital needs. Trulieve’s objective is to apply their successful strategies and execution to new operations. This was the rationale behind their $2 billion acquisition of underperforming Harvest Health and Recreation last year. Profitability, not losses, is leveraged into growth areas. Further, it gives them flexibility that most cannabis companies don’t have by reducing reliance on high interest debt or dilutive equity. In their March 2022 investor presentation they reported raising $425 million at 8% interest, while most of the industry has borrowed at 10% or 12%.

There are other drivers on the horizon that would have an immediate positive impact on Trulieve, listed here in order of probability:

Recreational legalization in Florida is being widely discussed for perhaps 2024. This would open up cannabis to the vast majority of citizens that don’t currently have access, and also to the huge number of tourists that visit the Sunshine State. Estimates are that business could double. Trulieve would benefit more than any other company because of its dominant position in Florida, and also because that’s where the most of its business takes place.

Federal banking reform would give cannabis firms access to the full US financial system, greatly facilitating business transactions, lending, and so on. Financial services are currently limited because cannabis is still illegal on the federal level. The SAFE Act, which would do this, has been proposed multiple times in Congress. It hasn’t made it through the congressional gauntlet yet, but has many supporters.

Federal tax reform has also been proposed. Currently federal income taxes for cannabis firms are unfairly burdensome. Firms are not allowed any business expense deductions (other than cost of goods sold) commonly available to any other company, again because they sell an illegal product. So in 2020, for example, in 2020 Trulieve was unable to deduct $150 million in SG&A expenses from taxable income, and paid much more ($94.5 million on $223 million of operating income) than similar companies in other industries. The immediate benefits from tax reform are obvious.

What happened to the stock price?

Stock chart for Trulieve

Stock chart for Trulieve (Seeking Alpha)

Trulieve and every cannabis company got ensnared in the emerging high-growth company mania of 2020 and the precipitous reversal to risk-off investing in 2021-22. At extremes of market sentiment all emerging high growth overshoot at the top and bottom. Like all investors, I was caught up in the excitement to some degree, although I stopped writing on the sector early in March 2021 and didn’t resume until late November when conditions were greatly improved. In any case, as I wrote recently in My 5-Year Cannabis Investing Plan, cannabis investing has always been a long-term proposition.

Cannabis is indeed an emerging high-growth sector, but each sector is different. Certainly Trulieve is different than high-profile brethren like SoFi (SOFI) and Snowflake (SNOW), etc. in important ways. But for the entirety of the now popped bubble, the professional investment class has treated all emerging high-growth sectors the same — the latest policy is just take them all out and shoot them. The result is some interesting valuations, as the table below comparing price to earnings and price to sales ratios illustrates.

2021 PE 2022 PE 2021 P/S 2022 P/S
CANNABIS
Trulieve 19.1 15.2 3.61 2.32
Green Thumb 41.3 23.9 3.41 2.69
Verano 11.7 11.1 4.12 3.54
OTHER HI GROWTH
Upstart 62.5 38.7 9.9 5.92
Coupa 129.1 122.9 10.23 8.45
Cloudflare 2716 949 29.29 21.91

Source: Seeking Alpha

I am not making a case that cannabis PE and P/S ratios should be identical to high tech. High tech is often more scalable, operates in a global market, and there are numerous other differences that elevate their PE and P/S. Still, it appears that cannabis fundamentals have been forgotten in the race to dump all emerging growth. The cannabis industry is projected to grow at 25-30% annually for most of the decade, and the good companies will do better than that (Trulieve’s 2022 revenue growth is projected at 55%). They were overvalued at their peak, but appear to be undervalued now.

Risks

As with any growth industry, if the anticipated growth does not materialize then forward multiples of earnings and sales will have to be re-rated. As an emerging industry there are also unknowns that involve risks. In Trulieve’s case, the maximum bull case assumes favorable legislation and regulation continues to move forward. In addition, the research on the health effects of cannabis that were blocked for many years are just beginning, with obvious results for the industry depending on which way they go. Finally, cannabis is becoming a very competitive space. The competitive winners are yet to be determined, but based on its performance so far Trulieve looks to be one of them.

Summing Up

Two years ago, when I first wrote about cannabis, it was truly the Wild West. Many new firms were competing for attention. Since then the market has started making more sense. Former darlings like Harvest (OTCQX:HRVSF), Liberty (OTCQX:LHSIF), MedMen (OTCQB:MMNFF), iAnthus (OTCPK:ITHUF), Tilray (TLRY) and Aphria have faded away in spite of big promises and huge amounts of investor capital. Others will follow. Another group of companies, like Verano, Green Thumb and Trulieve, are rising on superior strategy, execution, and most of all, profits. On many measures Trulieve is at the top in performance and potential. Successful investing means investing in companies that will be successful. The chances of doing this are greatly improved by picking companies that have a proven record of success. Trulieve gets my Strong Buy recommendation.


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