- Trulieve reported Q4 2020 results to cap off a strong year that saw both revenue and EBITDA roughly doubling from the prior year.
- Management is guiding for 2021 revenue and EBITDA to grow +50%, which is hard to find in any other CPG or retail business.
- We continue to view Trulieve and Green Thumb as our top 2 cannabis picks due to a combination of revenue growth and strong margin.
Trulieve (OTCQX:TCNNF) posted impressive Q4 results to finish 2020. The stock is up nearly 300% since the beginning of 2020 including 40% gains YTD in 2021. However, we believe the valuation remains cheap based on its growth outlook and massive catalysts still remain including the passage of the SAFE Banking Act and legalization of recreational cannabis in Florida.
Trulieve delivered an impeccable performance in 2020 as the company continues to grow quickly while maintaining industry-leading profitability. The recent Q4 results highlighted the attractiveness of the Florida market and Trulieve's dominance in the state. Revenue grew 24% from the previous quarter to $168M while EBITDA margin remains healthy at 46%. EBITDA margin has declined in the last quarters likely a result of the contribution of lower-margin revenue from Pennsylvania and start-up costs in Massachusetts. The ~50% EBITDA margin is truly impressive in the CPG industry. Trulieve is an example of the power of scale and market dominance.
Trulieve's profitability remains one of the highest in the industry which is driven by its unparalleled scale in Florida. The company had 75 locations in Florida by the end of 2020 which is unmatched by any other markets in the U.S. Most states limit the number of retail stores per license holder and restrict cultivation capacity as well. For example, Massachusetts and New Jersey currently allow a max of 3 retail stores per operator whereas Illinois allows 10 and Pennsylvania allows 15. California has no cap but the free-for-all market has a low barrier to entry and extremely high competition. Moreover, most states do not require vertical integration which means that there are a wholesale market and higher competition. Whereas in Florida, the barrier to entry is high because each license holder is only allowed to sell products produced by itself. Trulieve has reached a level of scale both in cultivation and retail that will be hard to replicate even if the current regulatory changes.
(Source: IR Deck)
It is worth taking a moment to comment on the recent regulatory progress. New York has now officially passed legislation to legalize recreational cannabis and expand its existing medical program. However, the current proposal will significantly limit the ability for MSOs to reach scale. The ten existing medical license holders will be able to stay vertically integrated while new entrants could only participate in either wholesale or retail, not both. Therefore, the New York cannabis market is shaping up to be a disappointment for companies like Trulieve. Existing operators will benefit but the scale seems difficult to reach. Therefore, we see a low likelihood of Trulieve entering the New York market in any significant way. We have also seen other MSOs acquiring various assets including Ayr Wellness (OTCQX:AYRWF) acquiring an Illinois asset for $110M and Cresco Labs (OTCQX:CRLBF) acquiring assets in Florida and Massachusetts. Trulieve has acquired Mountaineer for a small $6M to add cultivation and 2 dispensary permits to its West Virginia portfolio; Trulieve itself had won 4 dispensary permits and one process license and the company is looking to replicate its vertical-integrated model in a new medical market. Trulieve also announced that it received approval to begin cultivation at its Massachusetts facility with the first harvest expected during 2H 2021.
Trulieve has historically been a prudent allocator of capital and has shunned large-scale acquisitions; instead, it opted for smaller deals to provide an entry point for its buy-and-build strategy. Its entry into the Pennsylvania market was the largest acquisition it did which was only $66M in upfront payment plus $75M of the additional earnout. We expect Trulieve to continue its cautious acquisition strategy as Florida remains a high-potential market given its growing medical market and hope for recreational legalization potentially in either 2022 or 2024.
Trulieve currently trades at 8.3x EV/Sales and 18x EV/EBITDA based on Q4 annualized results. However, management provided 2021 guidance of $815-850M in revenue and $355-$375M in EBITDA. Using the mid-point of these guidance ranges, its valuation multiples drop to 6.7x sales and 15.3x EBITDA. For a company that is growing revenue at 60% and EBITDA at 45%, this multiple is very cheap. We believe Trulieve shares continue to screen cheap based on the peer set and represent one of the safest cannabis stocks. Most of the MSOs trade at much higher multiples despite slower forecasted growth and lower margins. We think the market has mispriced Trulieve shares in our view and long-term value-oriented investors should like Trulieve even more.
Trulieve is also well-capitalized and is a cash machine. For 2020, the company generated positive operating cash flows of $100M after paying $22M in interest and a whopping $105M in cash taxes! Due to the punitive IRS 280e, cannabis companies couldn't claim business expenses which results in massive tax bills. Trulieve only reported GAPP pre-tax income of $157M which implies an effective tax rate of a ridiculous 67%. Trulieve is getting punished so hard and one could only hope one day the system could be fixed. Nevertheless, Trulieve has proven to be a highly cash-generative business that does not depend on external funding sources. The company has only opportunistically issued equity when shares are trading at high valuations. We really like the capital allocation of Trulieve and see the potential passage of the SAFE Banking Act or similar legislation as a key catalyst for multiple re-rating due to the impact on cash taxes and uplisting to major U.S. exchanges.
We continue to view Trulieve as the most dominant cannabis operator in Florida and an example of how to achieve scale and margin in a single market. It is impossible to replicate Trulieve's success in Florida based on existing regulations in other states but we think the company could add value in many other states under its vertical-integrated business model. While Trulieve has not pursued acquisitions as aggressively as others, we think its share price performance validates its strategy and discipline. We continue to rate Trulieve our favorite cannabis pick along with Green Thumb.
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