Trulieve (OTCQX:TCNNF) has had a rough slide since coming into the spotlight in 2021, a year in which US cannabis stocks experienced an intense rally due to hopes for quick federal legalization. Amidst the frenzy, TCNNF undertook large M&A in order to widen its footprint. As those hopes were disappointed, TCNNF and the rest of the sector saw their stock prices hit hard. Meanwhile, price competition has led overall profit margins to deteriorate on account of the wider footprint, yet the company is still left with the sizable debt load it took to fund the acquisitions. The company still remains one of the higher quality names in US cannabis and the stock is too cheap here.
TCNNF Stock Price
TCNNF peaked above $50 per share in early 2021 but has since crashed 80%.
I last covered TCNNF in August where I rated the stock a strong buy on account of the valuation. The stock has since fallen another 50%. While the risks have increased, the valuation proposition has also improved – TCNNF remains a diamond amidst the beaten up cannabis sector.
TCNNF Stock Key Metrics
TCNNF is one of the largest multi-state operators (‘MSOs’) in US cannabis, with a 180 store footprint spanning 9 states (Georgia and Ohio have not yet come online).
The latest quarter saw revenue grow by 34% YOY as the company lapped its last quarter without the Harvest acquisition. Revenue declined 6% sequentially to $301 million due to pricing pressures. Gross margin was best in class but fell 200 bps sequentially to 56%. Prior to the Harvest acquisition, TCNNF was one of the few cannabis operators to post positive GAAP profits. The company posted a GAAP net loss of $115 million in the quarter. After numerous adjustments, adjusted net income was positive $4 million. Adjusted EBITDA was $99 million, or 33% of revenue which again ranked among the highest in the sector but represented a steep decline from the typical 40% to 50% rate of just several quarters ago.
Florida remains the crown jewel for the company. 122 of the company’s 180 dispensaries are located in this state. TCNNF is 1 of 22 approved licensees and operates 25% of the approved dispensaries, but maintains around 50% market share. TCNNF was one of the only MSOs to invest significantly in Florida from the very beginning.
TCNNF experienced headwinds in the state which had an impact on overall fundamentals due to the company’s large concentration there. The medical-only market saw net new patients decline to only 1,500 per week in the third quarter with the slowest growth in the end of July. On the conference call, management explained the decelerating patient growth as being due to a “reversal of COVID-related trends,” as that period was benefited by an increase in at-home activity and stimulus dollars.
Management also noted that 70-day supply limits took effect at the end of August. While Florida has legalized medical cannabis for many years, governor Ron DeSantis has been vocal about his opposing views, and this is one example of how quickly regulations can change in the industry. While I expect this measure to have little impact on the long-term thesis, management did note that a low single-digit percentage of patients are estimated to be affected. These factors led competitors to engage in aggressive promotion campaigns, with some offering discounts of 50% or higher. TCNNF has many stores where they are the “only game in town,” but its most productive stores were negatively impacted nonetheless. Just a reminder, Florida may become the largest legal US cannabis market as it has 22 million residents and 130 million visiting tourists every year. Medical patients currently make up less than 4% of that population base (0.5% inclusive of tourists).
Pennsylvania is another critical state for TCNNF. The company has 19 locations in the state, making it one of the largest operators.
While the state continues to be hurt by pricing pressures, TCNNF actually saw retail revenues increase due to a QoQ doubling of internally produced products. In a prior article on cannabis REIT NewLake Capital (OTCQX:NLCP), I noted that prospects for adult-use legalization in Pennsylvania have greatly increased following the results of the midterm elections.
Arizona is the third core state due to its prior acquisition of Harvest Health. Management noted that both traffic and revenue declined sequentially in the state, but the company has sold off the vast majority of legacy inventory with hopes for a more healthy promotional environment during the holiday season.
Over the last few quarters, TCNNF has seen its balance sheet deteriorate from a net cash position in the third quarter of 2021 to a deeply net debt position as of the latest quarter.
That net debt position comes as interest rates continue to rise and growth is slowing down due to pricing pressures. I was pleased to see management make the decision to exit unprofitable operations, including wholesale operations in Nevada and closing two dispensaries in California. TCNNF is one of the few operators in the sector that have made a deliberate effort to exit unprofitable markets in order to focus on profitability.
Looking forward, TCNNF expects to end the year with around $1.25 billion in full-year revenue and $415 million in adjusted EBITDA. That suggests roughly $312 million in fourth quarter revenues, implying minimal sequential growth in spite of a holiday season.
While TCNNF has seen GAAP profitability disappear, it remains one of the few operators generating solid cash flows. US cannabis operators pay artificially high corporate tax rates and interest expenses due to the federal illegality of cannabis. In the most recent quarter, TCNNF generated $51.3 million in free cash flow (defined as adjusted EBITDA minus interest and tax expenses).
In spite of the rising interest rate environment, TCNNF has demonstrated impressive access to capital. In the conference call, management cited having secured “a commitment for $70 million in real estate backed financing and a favorable rate compared to our existing debt.” They ended up securing $71.5 million of financing at a 7.53% interest rate for 5 years in December. TCNNF then announced another $18.9 million debt raise, also at a 7.3% interest rate for 5 years.
Management expects to reduce capital expenditures by at least 40% next year, implying around $120 million in CapEx in 2023. With the bulk of its aggressive CapEx program now most nearly completed, I expect debt raising to be more modest in the near term, with hopes that the company can finally begin letting cash accumulate to the balance sheet to reduce the financial risk moving forward.
Is TCNNF Stock A Buy, Sell, or Hold?
A lot has changed over the past few quarters in terms of my thesis for the stock. Growth has come to a standstill amidst pricing pressures and a tough macro backdrop and the company’s balance sheet is now much more messy than before. Yet with the stock down 80% from highs, I’d argue that the financial damage has been more than priced in.
Near term catalysts for the cannabis sector have eroded especially since it has become clear that SAFE Banking might not be so easy to pass. But valuations are too cheap to ignore. In a world where alcohol companies like Boston Beer (SAM) and Constellation Brands (STZ) trade at 15x to 22x EV to EBITDA in spite of minimal growth, one could make an argument for superb upside at TCNNF in spite of the decelerating growth rates. Sure, US cannabis companies may not be able to generate their full earnings power until cannabis is federally decriminalized (removing 280e taxes), but Wall Street tends to be forward looking and major cannabis reform is probably a matter of “when,” not “if.” If TCNNF can allow its balance sheet to improve over the next few quarters, then its valuation may follow suit.
There remain great risks. The deteriorating fundamental picture might not end. It is possible that prices continue to fall indiscriminately, eventually leading to lower and lower unit economics and eventually negative EBITDA margins. Such a result might occur due to overproduction from both legal and illicit competitors, as well as a slower-than-expected normalization of public sentiment towards the plant. Another risk is that of management execution. It is possible that TCNNF management is “empire-building” and may seek to continue expanding even at the expense of overall margins. The acquisition of Harvest Health in hindsight was greatly misguided, as it greatly impaired both the cash flow generation and balance sheet of the company. Because TCNNF is not generating meaningful cash flows on a GAAP basis, it is highly unlikely that the company can take advantage of low valuations in its stock price through share repurchases. Investors should expect continued volatility in spite of low valuations – cheap can always get cheaper. I continue to view higher quality MSOs and certain ancillary stocks to be the best way to position long term in the cannabis sector. TCNNF offers both higher quality and undervaluation, making it a top pick among MSOs.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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