Green Thumb Industries Inc. (OTCQX:GTBIF) is often considered the leading company in the US cannabis industry, and for good reason. This is a company that has maintained a strong balance sheet and GAAP profitability. despite the difficult regulatory environment for cannabis operators. Amid an environment of rising interest rates and recession risks, that commitment to risk control is proving valuable.
This is a name you could have kept in the Cannabis Growth portfolio because of its value as a long-term holding. That being said, I have chosen not to do so primarily because I believe that Multi-State Operators (“MSOs”) are generally more risky and have therefore preferred to invest in names that offer higher return potential, albeit with higher risk. . I continue to find GTBIF highly buyable here as it continues to execute on the long-term growth opportunity for cannabis.
GTBIF stock price
After rebounding from the lows late last year, GTBIF has fallen to continue its brutal decline this year.
I last covered GTBIF in October, where I rated it a strong buy after President Biden issued a new comment on his intentions for cannabis reform. Since then, the stock has fallen 40% as the valuation improvement came along with the increased risks.
GTBIF Stock Key Metrics
GTBIF has a premier footprint spread across 15 states, and many of these states have yet to legalize adult use sales.
In the third quarter, GTBIF continued to face macroeconomic headwinds from pricing pressure as it has throughout the year. Revenue increased 3% sequentially and 12% year-over-year to $261 million. Adjusted EBITDA grew 7% sequentially to $84 million, representing a 32% margin. This was disappointing because the adjusted EBITDA margin was 35% in the prior year, but reflected continued sequential improvement. However, GTBIF generated its ninth consecutive quarter of GAAP profitability with $10 million of GAAP net income. This is a remarkable achievement because US cannabis operators must pay “280e taxes”, where they cannot deduct operating expenses from the calculation of taxable income.
GTBIF ended the quarter with $147.3 million of cash against $255.5 million of debt. During the quarter, GTBIF exercised its right to extend the maturity of its senior debt ($250 million) for 1 year until April 30, 2025 – said debt has an interest rate of 7%. Most of GTBIF’s peers have increased their leverage profiles considerably after aggressive M&A portfolios in 2020 and 2021, but GTBIF, for its part, has maintained a more conservative leverage position. It should also be noted that GTBIF is current on tax payments: many US cannabis operators have deferred large tax balances in an effort to conserve cash. On the conference call, management stated that “concerning the downside is just as important as planning for the upside, and can actually create more value for stakeholders over time.”
Historically, GTBIF has generated consistently high profit margins, and in the most recent quarter it suddenly found itself neck-and-neck with Trulieve Cannabis Corp. (OTCQX:TCNNF), which has historically been the most profitable operator in the industry.
Management reiterated its long-term guidance for 50% gross margins and 30% EBITDA margins, but investors should probably take that guidance with a grain of salt, as this is a sector with rapidly changing regulatory conditions.
GTBIF continued to do well in New Jersey, which came online for adult-use sales this year. Rhode Island came online after the end of the quarter on December 1 for adult sales and Connecticut is expected to come online for adult sales for the next 2 quarters. GTBIF also has to wait for both Virginia and New York, as these states have legalized adult-use sales but are still in the planning stages of bringing them online.
Management noted that the company outperformed the industry overall. While GTBIF grew 13% yoy and 3% sequentially, the sector as a whole grew 3% yoy and 2% sequentially.
Unlike many other MSOs, GTBIF is generating strong free cash flow. We already saw that GTBIF is generating positive GAAP net income. Cash flow is even more apparent after stock-based compensation and one-time costs are added back.
I expect most investors to focus more on its announced partnership with Circle K to sell cannabis at gas stations. GTBIF plans to open 10 RISE Express brand medical dispensaries in Florida, leasing space adjacent to Circle K stores (Circle K operates approximately 600 locations in the state). Despite long being considered one of the top general carriers in the country, GTBIF has historically maintained a modest presence in Florida. This announcement has the potential to significantly boost its growth in the state. Management confirmed that it would be a landlord-tenant relationship and that they are still awaiting regulatory approval.
Are GTBIF shares buy, sell or hold?
As of the last quarter, GTBIF had 251.6 million fully diluted shares outstanding.
GTBIF holds a significant premium to other Tier 1 carriers, with only Curaleaf (OTCPK: CURLF) trading at a higher price.
I would say that GTBIF deserves to trade richer than CURLF due to the stronger margins. That said, does it deserve to trade much richer than Verano (OTCQX:VRNOF) or Trulieve, two names that generate solid profit margins on their own? GTBIF has a stronger balance sheet, but there is still a sizeable premium. Looking ahead, investors may do well to keep a dose of realistic expectations, as it’s not entirely clear whether SAFE Banking will go down that quickly. Absent the passage of SAFE Banking, there may be no legitimate chance of any kind of legislative reform for many years, especially if President Biden does not win any re-election bids in 2024. That said, GTBIF may still benefit from the same secular tendencies. as it has in the past: permanent action at the state level.
In addition to the states discussed above, there is another state yet to be discussed. In Minnesota, where GTBIF is one of only two licensed medical operators, Democrats took control of both the state House and Senate in the midterm elections, and the governor is also a Democrat. It seems very likely that Minnesota will legalize adult sales within the next year.
What is a proper valuation? Assuming a 15% long-term growth rate, 20% long-term net margins, and a 1.5x price-to-earnings growth ratio (‘PEG ratio’), you might see GTBIF trading at 4.5 times sales, representing a share price of $17.65 per share. This is a lower price target than I have given in the past – it reflects lower assumptions regarding long-term growth and profitability. That still reflects more than 100% upside potential.
What are the key risks? There are many. While GTBIF’s margins have remained constant due to its presence in limited license states, that may not be true indefinitely. Price pressures may persist and states may even change their regulatory frameworks.
GTBIF trades over-the-counter (“OTC”) and many brokerage firms have already stopped holding cannabis stocks. While this is not necessarily an imminent risk, the risk of incorrect bookkeeping seems higher in this industry since they are unable to work with larger accounting firms.
Another risk is that the stock could lose its premium relative to its peers. That premium has been falling in recent quarters. One possible reason was the fact that 3 former directors on the board left the company. On the call, management stated:
So what I can say is that the previous directors gave their reasons publicly in the resignation letter and it is difficult for me to elaborate on that. I think as we’ve said, the reasons had nothing to do in support of what was emphasized, nothing to do with the company’s business performance, our operations, financial performance, nothing to do with financial statements or even financial controls.
Still not a good look. However, Green Thumb Industries Inc. remains a high-quality name in a sector that should still hold promise in the long run. The company’s strong balance sheet and positive GAAP margins are clearly positive and should allow the stock to maintain a premium going forward. The stock has also proven to be more liquid, making it an attractive option for those looking to invest in short-term moves.
I still believe that higher quality MSOs and certain ancillary stocks are the best way to position yourself for the long term. Green Thumb Industries Inc. looks affordable for those looking for a long-term investment in the US cannabis sector.
Editor’s Note: This article discusses one or more stocks that are not listed on a major US exchange. Be aware of the risks associated with these stocks.