Darren415
The cannabis sector stocks have started trending higher due to positive indications on the cannabis regulations in the US. Green Thumb Industries (OTCQX:GTBIF) remains one of the better ways to play the legalization of cannabis in the country, though a change in corporate structure to allow an uplisting to a major stock exchange doesn’t appear an option. My investment thesis remains ultra Bullish on the stock due to the valuation mismatch with the opportunity in domestic cannabis space.
Strong Quarter Considering
Green Thumb reported record quarterly revenue of $261 million growing 12% YoY in a tough retail environment. The cannabis multi-state operator (MSO) produced impressive adjusted EBITDA margins of 32% for $84 million in Q3’22.
The company even produced positive cash flows of $44 million while paying $31 million in income tax payments during the quarter. Green Thumb would need to generate over $100 million in operating income in any normal business to pay taxes at those levels.
The MSO made some interesting moves recently such as opening up the Florida market with a deal with Circle K. Green Thumb only has 7 open dispensaries in the state despite a license allowing unlimited dispensaries. At least 4 other large MSOs have 50 medical dispensaries open in the state, so the competitive landscape could be tough.
Effectively, Green Thumb is only now fully entering the Florida market with the completion of the new cultivation facility in Ocala. In addition, the MSO has Connecticut, New York and Virginia opening up recreational cannabis sales in the next year or so following the recent opening of New Jersey.
The company has a lot of growth catalysts here and the removal of any inflation headwinds will ultimately help revenue growth. As impressive as the opportunities are for Green Thumb, the company actually cut costs in the last quarter.
Green Thumb outlined a SG&A cost basis of only $53 million in the quarter, down $4 million in the prior quarter. With 50% gross margins on over $260 million in quarterly revenues, the MSO is poised for solid profits when not having to pay 280E taxes.
No Quick Solution
The Canopy Growth (CGC) plan to consolidate their US operations while being listed on major stock exchanges offered a promising potential to the US MSOs. My research on the subject highlighted some of the issues facing Canopy Growth’s investor base and Green Thump provided some interesting comments on the subject.
On the Q3’22 earnings call, CEO Ben Kovler provided the following commentary on the subject based on a question from Jefferies:
We continue to study the structural changes that are out there, and understand what’s happening in sort of different kinds of ways. But I would say listing in the U.S. remains an objective of ours. We have to do list prioritization in order to make that happen and we are focused on checking those boxes.
Don’t think it’s likely for us to explore very creative legal structures in order to sort of get somewhere, but we are always open to new ideas. We are looking and studying, but our North Star remains sort of what I said. And I believe the direct U.S. listing is in the future. So that’s what we are planning for.
Green Thumb doesn’t appear too interested in pursuing a complicated legal structure to only obtain a listing on the TSX. The management team is clearly watching the proceedings by Canopy Growth, but the US government could likely offer a plan for uplisting to a US stock exchange prior to the Canadian company actually closes the prime deal with Acreage Holdings (OTCQX:ACRHF, OTCQX:ACRDF) in the 2H of next year.
The CEO sounded a lot more positive on the potential of the SAFE Banking Plus regulations. In such a scenario, Green Thumb wouldn’t want to spend a lot of time pursuing the complex structure proposed by Canopy Growth where the US stock exchanges don’t appear constructive on the plan.
Investors definitely shouldn’t preclude Green Thumb going down the path of Canopy Growth, but more details would have to leak out providing more certainty of the benefits of taking this path. The MSO is clearly focused on US uplisting efforts and the company will definitely utilize any available and realistic opportunity.
Analysts forecast revenues jumping to $1.2 billion in 2023 leading to $1.5 billion in 2024. The stock only has a market cap of $2.9 billion providing the opportunity for investors to own a leader in the US cannabis sector with plenty of growth catalysts without needing federal legalization.
The MSO has a slight negative net debt position, but Green Thumb has ~$500 million in net PP&E plus a strong EBITDA position to handle such debt. The company actually grew the cash balance in the quarter to provide a great example of the stable financial position despite the illegal status of cannabis.
Investors need to understand a leading cannabis analyst like Pablo Zuanic at Cantor Fitzgerald has a $36 price target on the stock. After the Q3’22 earnings report, Cantor actually hiked the price target from $32 despite the stock trading at only $12.
Takeaway
The key investor takeaway is that Green Thumb doesn’t appear interested in a complex exchange share structure with a better path to uplisting shares to a US exchange in the works. The stock is incredibly cheap here at far less than 10x forward EBITDA estimates, but investors can’t be certain any legalization will ever occur.
Green Thumb has the financial position to survive a challenging environment in the cannabis space, while the stock offers tons of upside on cannabis legalization.
Be the first to comment