It’s been almost six months since I last wrote here about Trulieve Cannabis (OTCQX: TCNNF), calling it great entry point then to $3.87. Indeed, it was, but is it a buy at the top price now of $5.61? In this part, I discuss why it stacks up, review the two quarterly reports since my last article, rate the updated outlook, view the chart, and dig into Trulie’s valuation relative to its peers, as well as the full.
Why Trulieve Rallyed
Trulieve is not at its highest point since my article in early June, but it is rated at 45%. The move is entirely explained by the recent move in August by the Department of Health and Human Services to move cannabis from Schedule 1 to Schedule 3 by the DEA. The reason this can be so good is that if the DEA does so, then the burdensome 280E tax would be waived, providing a huge boost to cash flow due to lower tax payments.
Investors should not assume this will happen anytime soon or even at all. If DEA were to move to Schedule 2, then 280E would remain. Even with Schedule 3 and 280E gone, the government can still impose another tax, although this may take some time to do.
Schedule 3 would eliminate 280E taxation, which would be great, but cannabis would still be federally illegal. NASDAQ and the New York Stock Exchange are not prohibited by law from listing cannabis companies, and the rescheduling will not necessarily provoke them to reconsider their policies. A bigger reason to change would be the passage of the SAFER Act, but that probably won’t happen before the 2024 election and wouldn’t require them to start listing US cannabis companies.
A look at Q2 and Q3
TCNNF reported its third quarter on Nov. 9 and provided a new 10-Q. He had reported the second quarter in early August. Analysts, according to Sentieo, had expected the company to report second-quarter revenue of $281 million with adjusted EBITDA of $73 million. Revenue fell 10% to $281.8 million with adjusted EBITDA of $78.7 million. In the third quarter, they forecast revenue to fall 10% to $269 million with adjusted EBITDA of $73 million. Revenue was slightly better at $275 million, and adjusted EBITDA was also ahead of expectations at $75 million.
Year-to-date revenue of $842.2 million was down 8%. Gross margin fell from 57.9% to 51.6%. Weighted down by lower gross profits and a $307.6 million goodwill impairment, which doesn’t mean much to me, operating profits fell $45 million to -$250.8 million. Excluding the impairment charge, operating profits expanded despite a sharp decline in revenue.
Looking beyond the income statement, cash flow from operations has fluctuated widely, as the company used $31.9 million to fund the first three quarters in 2022. It generated $70.4 million in the first three quarters of 2023. A large portion of that has been inventory swings, which consumed over $87 million through the first three quarters of 2022 and generated more than $65 million this year so far. A rising income tax payable has also helped. On a positive note, capital expenditure has fallen significantly. The balance sheet shows net debt at $399 million, which is significantly lower than at the end of the year or a quarter ago. This excludes income tax payable, which is $205 million.
Analysts predicted ahead of the report that revenue in 2023 would fall 10% to $1.116 billion with adjusted EBITDA margin falling 24% to $305 million (27.3% margin). Now they expect revenue to fall 10% still, but to a slightly lower $1.114 billion. Adjusted EBITDA in 2023 is forecast to decline 23% to $307 million.
For 2024, the forecast has gone from revenue of $1.195 billion to $1.114 billion, unchanged from 2023. Adjusted EBITDA is expected to increase 2% to $313 million, from the previous forecast of $327 million.
Ahead of the third-quarter report, 4 analysts were forecasting 2025 revenue to rise 3% to $1.18 billion with adjusted EBITDA expanding slightly to $328 million. Now 5 analysts forecast revenue to be up 4% to $1.157 billion with adjusted EBITDA up 2% to $320 million.
So the numbers for the quarter were stronger than expected, but analysts lowered their outlook.
Trulieve is trading in a small portion of the country where it peaked in 2021:
The biggest bolus of volume over the past three years has been between $3.50, near the all-time low, and $7.50, which was first broken at the end of the disastrous December 2022. Taking a look at last year, that December to remember is quite evident:
I first recommended Trulieve as a relative buy here in February, and the stock is still lower today, though it finally broke through in early September. It is currently well above the price I reiterated my interest in early June. I see support at $4.50 and resistance at $6.25.
Trulieve is free and peer-to-peer
I think Trulieve is the cheapest of the 5 largest MSOs by far, based on where it trades by enterprise value with projected adjusted EBITDA for 2024:
I think Verano (OTCQX: VRNOF) is a good comparison given its similarly large exposures to Florida, Arizona and Pennsylvania, and the stock also trades below average, but at a significant premium to Trulie. Its balance sheet is more strained, with a current ratio of just 1.0X and tangible negative book value. I think the projected VRNOF adjusted EBITDA margins are too high.
One of the things that worries me about MSOs and even Trulieve is the lack of tangible book value. In Trulieve’s case, the tangible book value is only $12 million. There are far worse rates for peers, and the high debt levels worry me. Of course, if the 280E goes away, so does this issue.
I recently presented a set of targets for the end of 2024 based on the enterprise value in adjusted EBITDA projected for 2025. It’s an either-or situation, as far as I can tell. If 280E goes away, the valuation could rise to 8X, which would be $11.31, 102% higher. I think this target may be too low. If it doesn’t go away, then I think the multiple would drop to just 3X, which would be $2.93, 48% lower.
I still like Trulieve despite the higher price. I increased it last week in my model portfolio that aims to beat the US Cannabis Operator Index by 25%. I really like the stock compared to other MSOs, and as I discussed above, it seems cheaper than its counterparts. In my opinion, MSOs can do better if 280E goes away, but they will fall if it doesn’t.
I don’t currently own any in the Beat the Global Cannabis Stock Index model portfolio, where I only own two other US cannabis companies at the moment. I have a lot of exposure to three Canadian LPs and several ancillary companies. Each of the Canadian LPs I own in the model portfolio trades below tangible book value. They will not be affected by the elimination of 280E. While ancillary companies will not be directly helped by the end of this tax, their customers will be, and I expect that over time their revenues and profits will increase if this happens.
It’s not yet clear whether Florida will move to legalize adult-use cannabis, but that would be a positive for Trulieve. The company is heavily dependent on its home state medical cannabis market, and that market is seeing essentially slow growth. Each of its larger peers also operates in the state, so it would hurt them too if the medical cannabis market slows further.
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