Trulieve's Massive Growth Potential Makes It A Strong Cannabis Pick
Summary
- Trulieve delivered impressive results in 2020 and is well-positioned to generate strong performance in the years ahead driven by efficient operational execution and robust demand for cannabis.
- The company's leadership in Florida's medical cannabis market, expansion into other states and additional opportunities in medical as well as recreational cannabis will boost its growth trajectory.
- Even after the tremendous rally in Trulieve stock over the past year, I anticipate more upside backed by strong growth expectations and cannabis legalization in additional states.
Trulieve Cannabis (OTCQX:TCNNF) delivered a splendid performance in 2020 and is poised to continue to grow rapidly given its dominance in Florida's medical cannabis market and initiatives to expand in other states. The growing support for the legalization of cannabis is expected to translate into opportunities worth billions of dollars for Trulieve and other multi-state operators like Green Thumb (OTCQX:GTBIF). Moreover, Trulieve is among the very few cannabis companies that are currently profitable.
Source: Seeking Alpha
Trulieve stock has rallied a whopping 408% over the past 52 weeks, thanks to the company's impressive operational results, growing demand for cannabis and favorable developments with regard to marijuana reforms. I believe that the stock has more room to run and is a great pick for investors looking for attractive returns in the cannabis space.
Leadership in Florida and opportunities in other markets
Trulieve has a commanding position in the medical marijuana market in its home state Florida. The company continued to expand its retail presence in the Sunshine state by adding 28 stores in 2020. It ended the year with 75 stores in the US, of which it operated 70 stores in Florida. Trulieve boasts a 49% market share of Florida's cannabis oil market and 53% of the flower market. Given its market leadership in the medical marijuana space, the company is in a great position to expand into the recreational cannabis market if the state legalizes it in the future.
For those concerned about Trulieve's exposure to a single state, the company is expanding its presence into several other lucrative markets. Last year, it entered Pennsylvania by acquiring medical marijuana cultivator and producer PurePenn and the dispensaries of Solevo Wellness. Prior to Pennsylvania, Trulieve entered the California market via the acquisition of Leef Industries dispensary in 2018 and marked its entry in Connecticut with the acquisition of the Healing Corner dispensary in 2019.
Trulieve also expanded into Massachusetts with the acquisition of Life Essence in 2018. The company expects to open its first dispensary in Massachusetts in the second quarter of 2021, with more locations expected in the second half of the year. It also plans to launch its wholesale business in the state after its first harvest in the second half of 2021. Coming to West Virginia, the company has been granted permits for four dispensaries and recently announced an agreement to acquire Mountaineer Holding, which holds permits for cultivation and two dispensaries in the state.
As per BDSA, legal cannabis sales in the US rose 46% to over $17.5 billion in 2020. BDSA expects US legal cannabis sales to grow at a CAGR of 15% to $41.3 billion in 2026. Given Trulieve's strong momentum, I believe that the company has the required capabilities to further strengthen its position in the existing markets and enter several new states, which are anticipated to legalize medical and adult-use cannabis. Recently, New York became the latest state to legalize recreational cannabis.
Solid growth estimates
Trulieve's revenue jumped 106% to $521.5 million in 2020 driven by higher retail sales due to an increase in patient count, expanded product portfolio and more dispensaries. The impressive top-line growth helped the company in delivering a third straight year of profitability, which is currently rare for several cannabis companies. Trulieve's adjusted EBITDA grew 99% to $251 million and reported EPS was up 15% to $0.53 in 2020.
However, the company's adjusted EBITDA margin declined to 48.1% in 2020 from 50% in 2019 due to expenses associated with the expansion into new markets. Having said that, Trulieve's adjusted EBITDA margin was still superior than its peers Green Thumb and Cresco Labs (OTCQX:CRLBF), which delivered adjusted EBITDA margin of 32.3% and 24.4%, respectively, last year.
Overall, Trulieve's financial position looks strong and I feel that it would easily be able to deliver its 2021 revenue guidance of $815 million-$850 million and adjusted EBITDA forecast in the range of $355 million-$375 million. The company is not only expanding its retail presence (plans to open 39 stores this year) but is also ramping up its cultivation capacity. It is also boosting its revenue by offering higher-margin products like edibles. Plus, Trulieve's high-quality products are helping it gain customer loyalty, which reflects in its retail customer retention rate of 72%.
Source: Company Reports, TIKR.com
Based on TIKR.com's estimates, analysts expect Trulieve's revenue to grow 62.1% to $845.43 million in 2021 and cross the $1 billion mark in 2022. The company's adjusted EBITDA margin could contract this year due to expenses to support its growth initiatives. Analysts currently expect Trulieve's reported EPS to rise about 123% to $1.18 (adjusted EPS projected to grow 142% to $1.33) in 2021 and then increase by 47% to $1.73 (adjusted EPS of $1.97) in 2022.
Risks involved
Trulieve is investing heavily in its expansion plans and this might be a drag on its margins over the near term. Also, the company has been extending its reach beyond Florida through several acquisitions. Any potential problems arising from the integration of the acquired companies could impact Trulieve.
Currently, medical cannabis is legal in 36 US states and four territories. That said, research on the benefits of medical cannabis is still in the early stages and any unfavorable information on medical cannabis could impact the demand for Trulieve's products.
Lastly, investors need to be aware that generally, stocks in the cannabis sector tend to be volatile. Any adverse news associated with the cannabis industry or regulations or lower-than-expected financial results could pull down Trulieve stock significantly.
Conclusion
As per TIKR.com, the average price target for Trulieve stock stands at $68.08, which implies an upside potential of about 50.5% from the closing stock price of $45.24 as of April 1. Moreover, Trulieve is trading at a forward EV/EBITDA multiple of 15.31, which is lower than the sector median valuation multiple of 16.90 (Source: Seeking Alpha). Notably, rival multi-state operators Green Thumb and Cresco Labs are trading at higher forward EV/EBITDA multiples of 21.02 and 16.80, respectively.
Trulieve is one of the most promising companies in the medical marijuana space. The company's dominant position in Florida will help in capturing more business in the state and it can replicate its winning strategy to markets beyond Florida. The growing demand for legal cannabis, Trulieve's national expansion efforts and cannabis legalization by more states are catalysts that I believe will ensure solid growth for the company in the years ahead. Also, any positive developments with regard to the SAFE Banking Act will highly benefit Trulieve and peers. The Act, if passed, will help cannabis companies gain access to financial services offered by banks and obtain funds at a lower cost.
Overall, in my opinion, investors looking for opportunities in the cannabis sector should add Trulieve to their portfolio.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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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Comments (15)
Thanks Edgestocks Research, so do expect their margins to come down substantially as they move into other states or do you think they can still achieve Gross Margins 70 percent plus?
