The market has become so negative on the cannabis sector that even strong operators like Trulieve Cannabis (TCNNF) have seen stocks dip 20% in a few months. Without all of the hoopla in the market, the company just reported one of the largest quarterly revenues. With a market valuation now below $1 billion, the U.S. multi-state operator offers a compelling value without the aggressive spending rampant in the sector.
Not So Small
Trulieve is very focused on the Florida cannabis market possibly causing the typical investor to look past the company. A lot of investors were attracted to the Canadian LPs due to the global expansion possibilities, but those haven’t panned out as much as expected.
Trulieve is a much larger organization than most probably think. The company has over 2,000 employees now with 30 retail stores open in Florida. The total cultivation space is now up to 1.6 million square feet to meet the needs of 192,000 patients. The amount doesn’t match the Canadian operators, but a production capacity of 62,000 kg in a single state better matches supply with demand.
In the last few months, Trulieve has quietly made entries into California, Connecticut and Massachusetts. The company only has access to single dispensaries in Palm Springs, CA and Bristol, CT along with three locations in Massachusetts. The current plans aren’t large, but Trulieve is definitely poised to grow beyond the Florida market.
Profit Machine
In a sector where plenty of companies aren’t focused enough on generating a profit, Trulieve is far ahead of the pack. In Q2 alone, the company generated an adjusted EBITDA of $31.6 million, up 60% from $19.0 million in March.
The company turned revenues of $57.9 million and 67% gross margins into an EBITDA margin reaching an incredible 55%. The focus on one particular market or state and slow expansion has left Trulieve in a far better position to expand in a logical method along with the cannabis sector assets now on sale. The only hiccup with Trulieve generating such large margins is the IRS tax code currently doesn’t allow for the deduction of operating expenses to reduce the tax bill.
A prime example of the benefits are the quarterly operating expenses of only $14.8 million or ~25% of revenues. Several Canadian players are achieving similar revenue levels with operating expenses in excess of gross profits. Trulieve is far more efficient.
With analysts forecasting 2020 revenues approaching $400 million and the stock valuation down at only $900 million, new investors will likely be happy the company took the slow and steady path to growth. Only as recently as April, the stock traded above $15 and hit a 52-week high of $21. With the stock at $8, the founders are committed to not sell shares until July 2020 via a voluntary lock-up agreement. Another sign of the value in the stock when the founders have not reason to extend a lockup.
Takeaway
The key investor takeaway is that Trulieve Cannabis continues to chase domestic growth via a slow and steady path to generate exceptional results. The U.S. MSO is positioned for success as the market overlooks the growth potential and the catalysts once the Federal government approves cannabis and allows for tax deductions along with listing on major stock exchanges.
Disclosure: No position.
