Trulieve Cannabis Corp (TCNNF)

[FUNMAN]

Growing Like A Weed, Trulieve Offers Potential 300% Return In 2020
Nov. 6, 2019 9:54 AM ET | About: Trulieve Cannabis Corp. (TCNNF), Includes: APHA, CRON, HEXO, TLRY

Read it here for the charts and graphs.

https://seekingalpha.com/article/4303156-growing-like-weed-trulieve-offers-potential-300-percent-return-2020

By: Gene Katz
Long/short equity, special situations, arbitrage, activist investor
(190 followers)

Summary
Trulieve is best-in-class in the marijuana industry and, with its near-term catalysts, offers a return of 300% over the next 12 months.

Trulieve believes that it's more efficient to go deep in one state rather than throw a wide net in a number of states.

As opposed to large and expensive acquisitions by its competitors, Trulieve has grown organically within the state of Florida, while making targeted and financially disciplined acquisitions in other states.

Significant profitability in 2019 that already supports its valuation, making it cheap compared to average S&P companies on a PE basis (14.4x vs. 18.2x forward PE), and on a PEG basis, with its growth rate, TCNNF is a steal.

Strong cash flow allowing company to fund growth and proven strategy with track-record of success facilitate expansion plans.

Introduction
Trulieve (OTCPK:TCNNF) is best-in-class in the marijuana industry and, with its near-term catalysts, offers a return of 300% over the next 12 months. TCNNF's latest quarter showed revenue growth of over 157% ($58.9M US vs. $22.9M US) from the same quarter in 2018, and strong growth is projected to continue. While most of TCNNF's comparable companies also have grown at over 100% year-over-year, no other company demonstrates significant profitability in 2019 that already supports its valuation, making it cheap compared to average S&P companies on a PE basis (14.4x vs 18.2x forward PE), and on a PEG basis, with its growth rate, TCNNF is a steal. Trulieve has not lost its strategic focus nor spent financial resources irresponsibly, like most of the competitors in the industry. TCNNF is generating robust free cash flow that can fund its pragmatic expansion strategy, without dilution to shareholders. The company has a superior business model, with a proven track record of success, which should allow it to emerge as the leading player in this growing marijuana industry.

There are few opportunities to capture the right investment in a new industry, that shows exponential growth, like the marijuana industry shows today. During such times, many companies launch in the hope of getting a piece of the action, and in this plethora of hype, it is difficult to differentiate the good from the bad. Remember all the hundreds of dot-coms that were boldly offered, that were ultimately doomed to bankruptcy. History is repeating itself in the marijuana industry. Whereas many onlookers were correct that dot-coms were the future, only a select few astute investors found the dotcom companies that, ultimately, changed the world, and with it, brought extreme investment riches. A similar opportunity presents itself today with marijuana, and at the front of the pack, stands Trulieve.

The Industry Size
Per Grandview Research, the global legal marijuana industry is estimated at $13.8 billion in 2018 and is expected to have a CAGR of 23.9%, through 2025. Legalization is driving the market, as is the medical use of cannabis. Due to legalization in U.S. and Canada, North America is the biggest market. Currently, 33 states in U.S. and District of Colombia have legalized cannabis.

U.S. legal marijuana Market

Medical marijuana held the leading market share of 70.3% in 2018. The global marijuana industry is based on the cannabis plant that has ingredients (called cannabinoids), which can be used for medical and recreational uses. CBD and THC are the most popular cannabinoids, used for medical purposes.

By 2025, recreational marijuana is expected to be the fastest-growing segment with a CAGR of 36.4% versus 23.9% for the cannabis industry. Recreational cannabis is defined as any use of marijuana apart from medical purpose, including drugs or food products. Few countries like Canada, Uruguay, Colombia, and some states in U.S. have legalized recreational cannabis, but the market is growing. In January 2020, Illinois becomes the newest state, and one of the most populous in the United States, to offer legal marijuana.

Legal Marijuana Market Size, Growth & Analysis | Industry Report, 2025

Positive Industry Trends
There are strong forces at work, supporting the growth of the marijuana industry, which include:

Large number of ongoing medical studies showing the positive medical benefit of cannabis, shown below
Increasing of legalization of cannabis, medical and recreational, removing the social stigma, and increasing the number of interested customers
Governmental support in many cases, due to tax revenue and also a needed substitute for opioids, as cannabis has minimal side effects compared to the risks of opioid addiction. The global opioids market size was valued at USD 25.4 billion in 2018, per Grandview research
Cannabis companies that survive this early race and become established, will have an 'early mover advantage', as the industry solidifies
'Black market' has billions of revenue, but due to the recent troubles with vaping and other dangers, there is growing public awareness of purchasing cannabis from regulated companies, which could transfer billions of revenue from the 'black market' to companies like TCNNF
Medical Benefits
There are numerous medical studies that show many positive benefits of marijuana. From the NIH, to Harvard, to the New England Journal of Medicine, research keeps moving in the right direction. The best source that summarizes the positive medical marijuana studies is www.herbonaut.com, that includes some of the following assertions:

Marijuana could alleviate chronic pain
Marijuana helps relieve nausea and vomiting in some chemotherapy patients
Marijuana decreases spasticity associated with multiple sclerosis (MS)
Marijuana can help with epilepsy
Marijuana reduces headaches and migraine attacks in some patients
Marijuana could relieve rheumatoid arthritis pain and stop its progress
Marijuana could help with osteoporosis by stimulating bone formation
Marijuana helps with the movement disorders associated with Parkinson's disease (PD)
Marijuana can lower arterial blood pressure in patients with hypertension
Marijuana can reduce anxiety
Marijuana can be an effective anti-depressant
Marijuana can help with sleep disorders by effectively improving sleep quality
Marijuana can help eliminate nightmares associated with PTSD
CBD is a potent antipsychotic for schizophrenia patients
Marijuana could help with Alzheimer's disease (AD) and dementia
Many more uses potentially exist. For instance, in 2013, my father died of glioblastoma (aggressive brain cancer), which is generally believed to be incurable, but just a couple years ago, researchers found that marijuana stops the growth of glioblastoma and may, in fact, shrink these tumors. Just imagine the potential, each of the uses above has a multi-billion-dollar marketplace. For the medical studies that demonstrate the positive studies, please see: 61 Potential Benefits of Marijuana that Are Backed By Scientific Research

Large Marijuana Comparable Companies
As of November 4, 2019

Symbol

Price

Market Cap

Revenue3

Earnings3

Forward P/E2

Forward P/S2

Cash & ST Inv3

TCNNF1

$10.43

$1.15B

$58.9M

$25.9M4

14.42x

2.92x

$53.7M

APHA1

$5.13

$1.30B

$95.88M

$12.5M

36.6x

2.04x

$353.0M

CRON1

$8.08

$2.73B

$5.1M

NA

NA

18.3x

$1.76B

TLRY

$22.10

$2.16B

$45.9M

NA

NA

6.38x

$220.8M

HEXO1

$2.07

$535.0M

$11.72M

NA

NA

2.66x

$123.1M

GWPH

$136.16

$4.19B

$71.68M

NA

41.51x

6.53x

$583.7M

CGC1

$20.15

$6.86B

$68.8M

NA

NA

11.24x

$2.4BB

NBEV

$2.63

$209.5M

$66.35M

NA

NA

0.70x

$83.6M

OGI1

$3.26

$532.6M

$18.8M

NA

22.0x

4.58x

$66.7M

CVSI

$1.96

$201.4M

$16.85M

$1.23M

21.77x

1.90x

$15.7M

Footnotes:

Converted to USD, using 1 CAD = .76 USD
Today's market capitalization vs. Zacks consensus estimates for the following fiscal year. For TCNNF, source is Trulieve Cannabis Corp. Earnings Estimates
Most recent quarter, listed on Marketwatch. For consistency, some recent actuals have been excluded (for example, APHA)
TCNNF reported earnings of $58.4M, which included some one-time items. I am normalizing the earnings by using a 55% profit margin and then subtracting 20% for tax
In the comparable publicly-traded companies, few marijuana companies are expected to be profitable by the next fiscal year, and even fewer are profitable this year. Only APHA and CVSI, in addition to TCNNF, show profitability this year; however, CVSI has a limited footprint, and APHA's profitability is suspect because only a small amount of the business is from marijuana sales, with most revenue deriving from a distribution business in Europe, that lacks margin. Only OGI, CVSI, APHA, and GWPH show expectations for profitability for the following fiscal year. These 4 other companies have forward PE ratios of 22.0x, 21.8x, 36.6x, and 41.51x, respectively compared to TCNNF's forward PE of 14.4x or 1.5-3x more expensive.

TCNNF is the only company that has significant profitability in 2019, that already supports its valuation, even without considering the colossal growth rate. TCNNF's latest quarter showed a revenue growth of over 157% ($58.9M US vs. $22.9M US) from the same quarter in 2018, and strong growth is projected to continue, making TCNNF a steal on a PEG basis.

Forward P/E is much more significant than forward P/S, as revenue is not apples to apples. TCNNF is one of the only companies that have proven financial discipline in the marijuana industry, and hence, high cash positions in companies like CRON, GWPH, and CGC (which lead to high P/S ratios), signify risk to shareholders, as the companies have not shown financial discipline in the past nor a proven expansion strategy like TCNNF, and as a result, could squander this cash. On the other hand, certain companies have low P/S, such as NBEV, appearing cheap on this metric, but due to low margins, lack of profitability, and an inability to control supply, there is a reason for this low P/S valuation.

The companies above represent some of the best in the industry, and based on TCNNF's superior metrics (current profitability, strong growth, smart business plan, disciplined growth strategy, etc.), TCNNF should be trading with comparable companies on the high end of the multiples (at least 28-30x Forward P/E). This multiple would double the stock price today.

Better Business Model
Trulieve believes that it's more efficient to go deep in one state rather than throw a wide net in a number of states. Among other considerations, there are limitations to selling cannabis across state lines. "We chose to focus on penetrating a market," CEO Rivers said. "We decided to take a very deep and focused approach, as opposed to taking a wide and shallow approach."

By focusing on the state of Florida first, Trulieve has built a presence that includes:

Approximately 50% of Florida marijuana sales
Strong customer loyalty for their brand
Vertical integration of being both a producer and retailer
Robust profitability due to efficiency and scale
Better control of quality
Close governmental ties
Even TCNNF's ability to expand cultivation in Florida is a demonstration of its pragmatic approach and financial discipline. TCNNF doubled its capacity in just 3 months to almost 1,612,408 square feet, producing 54,609 kilograms. TCNNF achieved this phenomenal growth through low-cost "experimental greenhouses", which achieved the mark, and were integrated into the mix.

Trulieve is committed to replicating the company's success in Florida, in other states, with the same meticulous approach and financial discipline. Assisting in this effort, the company is generating free cash flow of over $50M ($9.3M cash from operations last quarter alone) on a run-rate basis, which it can use to fuel its growth, without risks of increased dilution or leverage.

Successful Acquisition Strategy
As opposed to large and expensive acquisitions by its competitors, Trulieve has grown organically within the state of Florida, while making targeted and financially disciplined acquisitions in other states, to serve as a base, from which it can replicate a winning Florida model in these other states. As a result, TCNNF has not burned through cash, nor diluted its shareholders.

Acquisitions have been limited to these targeted transactions:

May 16, 2019 - Entered into an agreement to acquire 100% of The Healing Corner, a medical marijuana dispensary located in Bristol, Connecticut. Connecticut has a high probability of recreational-use legalization in 2020, which should bolster sales.
Nov. 8, 2018 - Entered into agreements to acquire 100% of Life Essence, Inc. and 100% of Leef Industries, LLC.
Life Essence is a seed-to-sale cannabis company with multiple locations under development in the Commonwealth of Massachusetts. It was recently awarded letters of support from the cities of Northampton, Cambridge, and Holyoke, Massachusetts and is applying for licenses to build and operate three medical Registered Marijuana Dispensaries, three recreational marijuana licenses, and a 126,000 square foot cultivation and processing facility. These initiatives will allow Life Essence to build out its infrastructure and engage in cannabis cultivation, processing, and retailing.
Leef Industries is a licensed medical and adult-use cannabis dispensary located in Palm Springs, California. Leef Industries recently received one of only twelve fully-permitted annual licenses issued by the State of California. Currently, Leef Industries has demonstrated encouraging growth in the market, offering in-store and online shopping, along with product home delivery.
Even after making the acquisitions, Trulieve has focused on burning minimal cash, while setting up the business in these new states. For instance, the Massachusetts build-out described above is being financed by a smart sale and leasehold, where TCNNF was given $40 million in funding by a REIT landlord, to build out the Holyoke cultivation facility, to be completed in early 2020, at which point it will also open its 6 dispensaries in the state.

As the company has announced that it will enter two more states by the end of the year (6 total including FL, MA, CT, and CA), it is expected that TCNNF will soon announce further 'smart transactions' placing it in two more states, to serve as a base, from which it can replicate a winning Florida model.

Positive Company Dynamics
No other company demonstrates significant profitability in 2019, with $25.9M of adjusted net income in the latest quarter alone
TCNNF has a superior business model and acquisition strategy, as described above. For instance, expansion strategy in Massachusetts demonstrates that 6 dispensaries and a cultivation facility can be added without a large cash investment or dilution, and this can be replicated in other states
Approximately $53.7M in cash & ST Investments, with access to much more capital due to profitability and financial discipline that is generating a run-rate of $50M of cash flow from operations
Due to a large number of distressed players, Trulieve will have the opportunity to buy great assets for cheap
Strong track-record of execution and, in turn, potential to replicate profitable model in other states
Ability to double sales in Florida in the next 12 months
Wholesale cannabis sales and/or recreational cannabis sales will come to Florida in the next couple years, expanding its revenue
Valuation
Per the company's guidance, these events seem reasonable:

After the last earnings (mid 2019), TCNNF had 30 stores in Florida, 1 in Connecticut, and 1 in California (32 total).
By the end of 2019, TCNNF will have 44 stores in Florida, 1 in Connecticut, and 1 in California, and at least 2 more in 2 other states (48 total).
By approximately midyear 2020, 6 more dispensaries will open in Massachusetts and more likely will open in Florida (60 total or 2x more from a year earlier).
By Dec. 2020, further expansion will likely be occurring in Florida and the new states. Furthermore, plans for wholesale and recreational expansion may commence in Florida.
Since so many stores are being added in 2018-2019, in-store sales will expand greatly in 2020 (not only will there be twice the number of dispensaries by June 2020, but the in-store sales will also improve as they penetrate the market).
Based on this understanding of events, TCNNF's valuation has the potential for 300% upside over the next 12 months:

To begin, the companies above in the comparable section represent some of the best in the industry, and based on TCNNF's superior metrics (current profitability, strong growth, smart business plan, disciplined growth strategy, etc.), TCNNF should be trading on the high end of the multiples (at least 28-30x Forward P/E versus its existing 14.4x). This is the first 100% increase in stock price.
Next, the company will greatly increase its revenue in Florida over the next 12 months due to increase of stores and in-store sales, surpassing analyst expectations for revenue and profitability. Dispensaries in Florida are going from 30 midyear 2019 to 44 by year-end 2019, to probably 50 by mid-year 2020, this would be a 66.7% increase of Florida stores, year-over-year. In addition to the new dispensaries in Florida, in-store sales will be expanding significantly in existing dispensaries, due to the number of new stores in 2018-2019, plus the customer base will keep growing at approximately 30% in Florida (per industry section above), with TCNNF getting a large portion of the business. Analysts are expecting fiscal year 2020 total revenue to increase by 62.04%, which seems conservative; Florida's growth alone should surpass this estimate (modeling 75% increase to annual revenue due to Florida alone). To achieve this estimate, I am estimating 30% growth in established stores (first 20) and 100% growth in newer stores (stores 21-30) and stores 31-50 are expected to ramp up per past track-record, getting to capacity within 18 months. Analysts expect total earnings of $0.54/share US (0.71 CAD) for 2020, and as Florida is highly profitable (with vertical integration regulation certainly not changing in 2020), there should be significant upside to analyst expectations for 2020 from Florida alone. Based on continued 55% EBITDA margins, Florida can generate $0.75/share US in 2020. An extra $0.21/share in earnings is another $6.30/share (30x multiple per #1) or an extra 62% appreciation from today's stock price.
With valuations of many cannabis assets now depressed and TCNNF's refinement of its expansion strategy, it is likely that TCNNF will exacerbate the pace of its acquisitions and further growth in other states, leading to yet more growth. Last year, the company acquired 8 dispensaries (6 in MA, 1 in CT and 1 in CA), and with its expertise, it is probable that over the NTM, the company will acquire 3-5x that initial number, leading to 24-40 new dispensaries in 2020, particularly since the company has growing cash flow to use for expansion and has announced that it will be entering two new states imminently. Furthermore, TCNNF has a core competence of cultivating product at a low cost, and with its strategy in MA, followed by a likely replication of its Florida strategy of 'experimental greenhouses' in all its other states, TCNNF will likely start to pick up substantial wholesale revenue in the other states, that while less profitable than Florida, will help it get to scale in other states. If done successfully, this will contribute an additional 15% unexpected increase to revenue and earnings. I am expecting an additional $0.13/share US in additional earnings surprises; an extra $0.13/share in earnings is another $3.90/share (30x multiple per #1) or an extra 38% appreciation from today's stock price.
Also, it is likely that opportunities will surface by the end of 2020, regarding recreational-use marijuana and wholesale opportunities in Florida. While they will likely result in minimal revenue in 2020, tangible revenue may start to formulate by 2021, and this future expectation will be absorbed ahead of time in the stock price, towards the end of 2020. Although I will not attribute an additional price appreciation to this, it should serve as a positive opportunity.
But it's not done there. TCNNF's biggest criticism is that they may not be able to repeat Florida's success in other states. If during 2020, Trulieve can prove successful expansion into other states (Massachusetts, Connecticut, California, and 2 more to be announced imminently) per #3, its multiple will double yet again (from the 30x Forward P/E projected to 56-60x Forward P/E). With its 100% growth rate (combined #2 and #3), the company would still be cheap, based on a PEG ratio, even with 56-60x Forward P/E. This multiple, of course, would double the stock price, once again, which would be significant considering all the other growth in items #1-4.
All this results in a whopping 400% potential increase in stock price. However, per the risks below, there is certainly execution and regulatory risk. As a result, in the valuation model, I discount the upside by 25%, to end up in a 300% expected return over the next 12 months.
The Risks
Trulieve is highly dependent on Florida, with concentrated regulatory risk
In the next couple years, there might be an end of vertical integration requirement in Florida. While this could serve as an opportunity for TCNNF to sell its cannabis brands to other dispensaries, it will also likely result in added competition and margin compression. That said, a change to vertical integration regulation in Florida is currently a 50% probability
Changing governmental regulations could delay or impede revenue from recreational use marijuana
Price of cannabis could go down, if states allow cannabis to be imported from outside of the state, impacting revenue and margin
Recreational legalization could lead to the opening of more dispensaries, taking away revenue from the medical marijuana market niche in Florida
Company's ability to expand business in Florida could be due to strong political connections in that state, which will not translate into ability to replicate model in other states
CEO's husband has had legal challenges, with recent action from the FBI, which could somehow impact the company with its stronghold in Florida
Expiration of lock up could create price pressure
Conclusion
Trulieve is best-in-class in the marijuana industry, and with its near-term catalysts, offers a return of 300% over the next 12 months. TCNNF's latest quarter showed revenue growth of over 157% ($58.9M US vs. $22.9M US) from the same quarter in 2018, and strong growth is projected to continue. While most of TCNNF's comparable companies also have grown at over 100% year-over-year, no other company demonstrates significant profitability in 2019 that already supports its valuation, making it cheap compared to average S&P companies on a PE basis (14.4x vs 18.2x forward PE), and on a PEG basis with its growth rate, TCNNF is a steal. Trulieve has not lost its strategic focus nor spent financial resources irresponsibly, like most of the competitors in the industry. TCNNF is generating robust free cash flow that can fund its pragmatic expansion strategy, without dilution to shareholders. The company has a superior business model, with a proven track-record of success, which should allow Trulieve to emerge as the leading player in this growing marijuana industry. As some in the marijuana business may say, get in at the lows, to enjoy 'the highs'.

Disclosure: I am/we are long TCNNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I will trade actively based on price.