NOTE: I am planning on doing a series of these on the cannabis industry. This is part 1 of 3.
We all know that certain businesses can continue to operate in the corona environment: grocery stores, Walmart, Target, liquor stores, some restaurants with takeout & delivery, etc. Mostly boring businesses that are slightly undervalued, with limited upside potential. What I am sure most of you may or may not know is that marijuana dispensaries have also been considered an “essential business” and have remained open in almost every state where medical and recreational marijuana is legal. Interesting, yes? Well let me continue.
What happens when you leave millions of people in their homes alone? What are most of those people going to do? Ding, ding, yes, jerk off, but also smoke weed. This presents an opportunity. But what do you invest in? Most of these companies are cashflow negative. Enter Trulieve Cannabis (TRNNF). Why is this company special? Because they actually make fucking money selling weed. Genius!
Here is the breakdown:
- Trulieve operates exclusively in Florida, where marijuana businesses are deemed essential. The company is an entirely vertically integrated "seed-to-sale" company and is the first and largest fully licensed medical cannabis company in the state of Florida. They were first to market in Florida, which is the main reason for the brand loyal and huge market share. In the Florida market where they operate, they control approximately 53% of the marijuana market (according to their website). Wow, control the market and you can make most of the money. Most of their competitors have less than 10% market share in Florida. Management must have been watching Narcos!
- This brings me to management. The CEO, Kim Rivers, runs the company very efficiently and is concerned with establishing a cannabis brand, not just pointlessly opening stores and selling weed. She is not your typical, Nancy Botwin. Before joining Trulieve, she was a lawyer and an entrepreneur. Her background has well prepared her for the regulatory and M&A aspects of the business and Trulieve continues to successfully open stores in Florida while many competitors are scaling back or pulling out. They recently passed a milestone, in June, by opening their 51st store in Florida. So what? Why is the above important? Because her strategy and management has allowed Trulieve to consistently make a profit while many other marijuana companies aimlessly flounder with a poor management strategy.
- Profitability. I talked about profits, so let’s look at the numbers. In the first quarter, Trulieve generated $96.1 million in revenue, up 118% from the 4th quarter. More impressively, the company generated a net income of $14.0 million on this revenue, in-line with net income of $14.7 million in the 4th quarter of 2019. That’s right, you read that correctly, net income not EBITDA or EBIT. Need I say more? Oh, and this is all while only being allowed to sell medical marijuana in Florida; its not recreationally legal there yet. Also, Trulieve is planning to introduce edibles to their product line up in 2020 so that will help increase their revenues with new products. For expenses, they are minimal so I’m not going over them, look at the statements. Of note, their interest expense is only $7 million for three months, so their interest coverage ratio will be quite high. Now, bear in mind, the only wrench in this analysis is that we are only going off 1st quarter numbers. Could the 2nd quarter (ended June 30th , releasing in August 12) completely shock investors? Absolutely. But if Trulieve has been profitable since the beginning of 2019, I can’t imagine they would suddenly post a loss in the 2nd quarter. I don’t anticipate the coronavirus will dramatically affect sales at this point. In fact, there are reports of record sales at their dispensaries with growth of 39% (Internet source, Seeking Alpha). I think the 1st quarter revenues addresses this concern.
- Lastly for financials, and most important in this corona environment is balance sheets. Honestly, one of the most telling parts of the efficiency of a company. For Trulieve, their financial position is strong, and they have a great capital structure. I don’t feel like writing about it so, here’s a quick chart I made to show what I felt were some important ratios and numbers. Yes, they don’t have a lot cash on hand relatively speaking, but their debt to equity ratio is minimal. (This is mostly a credit-type analysis of the balance sheet). Main points, capital structure is great, interest coverage is high, debt is almost zero and their liquidity is excellent and will remain so as they continue to print money. They ended the 1st quarter with cash of $101 million, up 381% from $21 million in the 4th quarter of 2019.
*As of Market close 7/15/20
| TCNNF | ||||||
|---|---|---|---|---|---|---|
| Price* | $15.29 | D/E | 6% | D/A | 0.03 | |
| Shares | 110.214 | EV/S | 16.70 | CR | 5.19 | |
| MC | $1,685.17 | EV/EBITDA | 51.72 | QR | 2.11 | |
| Debt | $19.00 | EV/Assets | 2.50 | |||
| Cash | $101.00 | IC | 4.43 | |||
| EV | $1,603.17 | EBITDA | 13% |
- It is hard for me to calculate a discounted cash flow for this company, due to a lack of historical financials and ability to track trends. I would like at least three years of financials to track a trend. Based on the data given I calculated a rough discounted cash flow for Trulieve and have a conservative price target based on NPV of $21 by the end of the year, $35 by 2021. Bear in mind, legalization would completely change this number. This is just purely based on current medicinal sales.
- Regarding the future and legalization, I have seen murmurs on the internet of states trying to quickly legalize marijuana this year to help state revenues that have been decimated from coronavirus. Some of you may have seen a spike in marijuana stocks due to this speculation. I can assure you that legalization will definitively not be happening in NY this year, but there is a strong case for legalization in 2021 by some states based on state deficits. I believe it is very likely that there will be legalization in NY and a majority of states by 2022. This is just speculation, but more ammo for the bull case.
So with that being said, here’s my opinion. The marijuana industry appears to be a bright spot in the economy right now and in the foreseeable future until the coronavirus is contained. Sales are strong for many companies in this industry and they have recovered fully. Word of caution, please do your homework if you’re investing in the marijuana industry as most of the companies are run with negative cashflows and they aren’t operating efficiently or have any solid market share or strategy. So, after spending some time looking at 28 different marijuana companies, this is one of few that I would recommend investing in. Overall, I can’t think of a better or more exciting “essential business” to invest in right now than the marijuana industry due to its growth potential.
Submitted July 15, 2020 at 08:31PM by CluelessProphet https://ift.tt/2DJjZR3
