Green Thumb Industries Inc (GTBIF)

[FUNMAN]

Thanks GE; great feel-good, recap article--->>>Green Thumb: The Pause Is Over

Jun. 29, 2021 1:20 AM ET
Green Thumb Industries Inc. (GTBIF)

https://seekingalpha.com/article/4436995-green-thumb-the-pause-is-over

Summary

Green Thumb is ready to rally after a long pause following the Blue Wave rally.

The MSO is now strongly positioned to benefit from the recreational cannabis push in New Jersey, New York and Virginia.

The stock is cheap at ~4.4x conservative 2023 sales targets.

Green Thumb Industries (OTCQX:GTBIF) investors were not happy with my pause prediction back in March, but the cannabis stock is down 8% during this period while the S&P 500 is up nearly 10%. Shortly after the article, the MSO (multi-state operator) fell to a low of $25, but the stock appears set to rally to new highs now. My investment thesis is far more bullish on Green Thumb now that time has passed and the stock price has fallen.

Major Catalysts

The call back in March came after the cannabis space soared on hopes of the Blue Wave pushing legislation reform in the cannabis space. While the thesis was accurate, the timing by the market was misplaced.

President Joe Biden continues to work towards an infrastructure bill as his primary goal in getting the U.S. back to work following the COVID-19 hit. Cannabis was highly unlikely to obtain the full attention of Congress or the President until after the economy was back into growth mode.

Just this last week the President suggested an infrastructure bill had full support of both parties. The political leaders still appear far off on how to pay for a bill costing $579 billion, but the U.S. government appears far closer to moving forward with other regulations in the next month or so leading to the possibility of a cannabis bill.

At the same time, Green Thumb appears set for a massive ramp in sales from the launch of recreational cannabis in key markets like New Jersey, New York and even Virginia. The MSO recently acquired Dharma Pharmaceuticals LLC offering a cultivation facility and one open dispensary in Virginia with access to open an additional five stores in the future as the state builds into a $1.5 billion opportunity with the sudden approval of recreational cannabis.

The MSO reported Q1 revenues of $194 million and analysts have Q1 revenue next year reaching just $263 million. While revenue growth of 35% and the addition of $70 million in higher quarterly revenues is massive for most industries, the numbers suggest Green Thumb has plenty of upside to these estimates.

First and foremost, the MSO has limited revenues from New Jersey and New York as both companies are still just allowing medical cannabis sales. Green Thumb predicts recreational cannabis sales won't start until 2023 while the acquisition in Virginia hasn't closed and recreational cannabis sales in that state might not start until 2024.

The sales ramp in these key states are borne out via the annual revenue estimates for 2023 now topping $1.65 billion and not even including Virginia in the estimates. Green Thumb will need to average $400 million in quarterly sales throughout 2023 to match these estimates as New Jersey and the $5 billion opportunity in New York should reach full speed.

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Data by YCharts

MSO Cheap

The stock only has a market cap of $7.3 billion here with 228 million fully diluted shares outstanding. Green Thumb trades at a minor premium over the MSOs like Curaleaf (OTCPK:CURLF), but the U.S. cannabis sector stocks are still far preferable over the Canadian cannabis LPs like Canopy Growth (CGC).

Both Green Thumb and Curaleaf continue to trade at nearly half the forward P/S multiple of Canopy Growth while Green Thumb only trades at 4.4x 2023 sales targets of $1.65 billion, which appear to be conservative.

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Data by YCharts

The MSO did recently raise debt at favorable terms with an interest rate of only 7%. Most in the U.S. cannabis sector have paid double-digit rates for recent funding rounds, so Green Thumb likely warrants a premium valuation.

This cheap valuation does rely on a major ramp in sales from states such as New Jersey and New York that have struggled with launching medical cannabis programs. These states need tax revenues and the success in Illinois should incentivize government officials to aggressively move forward on regulations. The state generated $205 million in tax revenues from cannabis sales over the first year of recreational cannabis sales and recently saw Q1 tax revenue hit $87 million to top liquor taxes.

While any aggressive move with social equity licenses could reduce the benefits of the limited license nature of New York reducing the advantage to MSOs like Green Thumb, ultimately though, cannabis sales should flow in these key states on the East Coast, but investors aren't guaranteed to be satisfied with the timing.

Takeaway

The key investor takeaway is that the MSO space, especially Green Thumb, are solid buys now after a long pause in the stock prices. As the federal government shifts from COVID-19 relief packages, cannabis has a better shot of attracting the full attention of the government.

Investors will want to be fully invested in the space which would include a top MSO such as Green Thumb. The market will definitely be volatile, so investors must be prepared for the Biden administration to pass on cannabis regulations and for a state such as New York to delay the launch of adult-use cannabis. The cannabis sector is always moving forward, but the pace is far from guaranteed.