Friday, November 12, 2021 8:54:59 AM
Nov. 12, 2021 2:31 AM ETGreen Thumb Industries Inc.
Summary
Green Thumb reported another solid quarter, though sequential growth rates probably aren't what cannabis investors want to see.
The company has massive growth opportunities ahead in key cannabis markets like New York, New Jersey, Connecticut and Virginia.
The stock is exceptionally cheap at just 12.5x conservative '22 EBITDA targets.
The U.S. MSO (multi-state operator) cannabis space hit new lows heading into Q3'21 earnings. Green Thumb Industries (OTCQX:GTBIF) is a leading provider in the space trading at a remarkably low valuation despite years of strong growth ahead. My investment thesis remains very bullish on the stock in the low $20s.
Temporary Slowdown
While Green Thumb beat revenue estimates for the quarter, the growth rates aren't what the market got used to in the U.S. cannabis space. After all, market leader Curaleaf Holdings (OTCPK:CURLF) reported Q3'21 revenues that missed analyst targets and only grew 2% sequentially.
Green Thumb reported revenues reached $234 million for nearly 50% growth YoY, but the sequential revenue growth was down to only 5%. The market has gotten used to double-digit sequential growth rates fueled in part by acquisitions.
The key here is that the growth potential hasn't peaked with tons of revenue growth in the years ahead just from the NE states launching recreational cannabis sales. States like New Jersey and New York have very limited medical cannabis sales now and the launch of recreational cannabis in the next couple of years provide massive growth opportunities. Along with Connecticut and Virginia, these large NE markets will likely contribute over $10 billion in additional sales over time.
The MSO reported comp sales grew 14% for the 48 stores open at least 12 months when the quarter started. Green Thumb has 66 retail stores now open in 14 states including the key NE states of New Jersey, New York, Connecticut plus Maryland, Pennsylvania and Virginia.
Source: Green Thumb August 2021 presentation
While the company is fully focused on the NE where the recreational cannabis markets are opening up, the rest of the country remains wide open for Green Thumb. Outside of Illinois, the whole middle of the country is wide open with either cannabis not approved or the MSO not having a presence, such as Michigan. Even Florida in the South is just a medical cannabis state with the potential in the next few years to easily double sales via the approval of recreational cannabis sales.
The market opportunity story clearly isn't over, yet the stock trades like an established packaged goods company with limited growth.
Far Too Cheap
Green Thumb just reported a quarter with adjusted EBITDA profits of $81.2 million based on 34.7% margins. Similar to revenues, adjusted EBITDA grew minimally sequentially, but the numbers jumped 52.6% from last Q3.
The MSO is on pace for reaching up to $1.2 billion in revenues next year. Based on just 35% EBITDA margins, Green Thumb would generate an EBITDA profit of $420 million. The stock has a market value of $5.3 billion based on 231 million shares outstanding placing the valuation at 12.5x EBITDA targets.
The company has plenty of upside potential for pushing those margins to the 40% range. Importantly though, the MSO is likely to grow the adjusted EBITDA at a 30%+ clip as the NE states open up recreational cannabis while the stock trades at only 12.5x EBITDA targets.
The current valuation is actually cheaper than established packed goods companies in the alcohol and tobacco space such as Constellation Brands (STZ), Altria Group (MO) and Molson Coors Beverage (TAP). All of these companies have invested in the Canadian cannabis space, yet the stocks trade as a basket with an EV/EBITDA multiple of 25x.
Chart
Data by YCharts
Green Thumb should easily double to match the EV/EBITDA multiples of peers in the alcohol and tobacco space. Ultimately though, the growth opportunity in the cannabis space should leave the MSOs like Green Thumb with higher valuation multiples.
The sector has been under pressure due to a lack of progress on federal legalization. The MSO space has plenty of growth opportunities without any federal legalization, but the stocks will struggle until gaining access to list on major stock exchanges. As seen recently, JPMorgan recently cut off prime broker clients access to buy cannabis stocks trading OTC. Unfortunately, these regulatory moves could leave the stocks pressured regardless of cheap valuations.
Takeaway
The key investor takeaway is Green Thumb reported another solid quarter. The market probably wants to see more growth, but the company is poised to re-accelerate growth in the years ahead as recreational cannabis markets open up in key NE markets. Investors should use the recent weakness in the stock to load up for the long term.
This article was written by
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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