US Cannabis: The Current Landscape

Welcome to the Deep Dive Video Essay Series. Today we are looking at US Cannabis.

Okay, so with the Senate recently flipped blue, Biden and the Democrats now have control over the Presidency, Senate and House, investors who follow cannabis stocks are now expecting the US to head towards some form of either descheduling or legalization.

Call it recency bias, but we believe the path is opening up for a new cannabis bubble. Except this time in the US, with major exchanges, access to apps like Robinhood and institutional capital pouring in that will make the Canadian pot stock bubble of 2018 look tiny.

Cannabis stocks have been around for years. Some are already even listed on the NYSE and NASDAQ, such as Canopy Growth, Aphria and Tilray – but the big difference is – the presence of US operations. For the most part, US operating companies haven’t been able to access the big American exchanges, because their business model involves producing and selling cannabis which is still a schedule 1 drug. Thus they haven’t been able to access popular retail trading platforms like Robinhood; which should in theory drive stock prices upwards.

The common blanket statement you hear about cannabis companies in general is the idea that they aren’t making money. Which is somewhat true, the Canadian operators are still not making money and are still in the process of rightsizing their operations. Conversely, many of the U.S operators are generating positive EBITDA and operating cash flow.

You may ask yourself “what’s the difference between Canada and the US?”

  1. It’s a much larger population.
  2. There are limited licenses in large states like New York and Florida
  3. US Operators can brand, market, and own every part of the process from seed to sale. Meaning they can grow their own product, process it, package it, and sell it in their own stores.
    So in todays video, I want to chat about who we at the Dive believe are the top 6 best-in-class operators in the US

Trulieve Cannabis (CSE: TRUL)

Our personal favourite is Trulieve. Truelive is primarily a single state operator within Florida, with a dominant market share over 50% thanks to an aggressive rollout across the state. They now have over 73 dispensaries and 1.9 million square feet of cultivation.

The company does have relatively smaller operations in California, Connecticut and Pennsylvania; where they have one retail store in California, three in Pennsylvania and one in Connecticut. They also have two non-operational states in West Virginia which just recently got approval and Massachusetts where they are in the process of building out a large 140,000 square foot cultivation and production building, alongside three dispensaries, all of which are expected to come online throughout 2021.

We believe Trulieve has really had one of the best long term viewpoints from an operational point of view. Trulieve knew from the start that they had a gem state and fostered it, disregarding the flag planting strategy many other operators pursued. Trulieves Florida operations are free cash flow positive, allowing Trulieve to reinvest their profits into additional states without the need to tap the equity market for overpriced debt or dilution.

What makes Trulieve particularly unique is that they are one of a few companies that have generally produced positive operating cash flow and EBITDA for the last few quarters. Trulieve consistently beats analysts expectations and even management’s own guidance.

Trulieve reported $136 million in revenue last quarter, a 93% increase, year over year; with EBITDA margins north of 40%. Their balance sheet is clean compared to their peers. They have no accounts receivable, a large cash balance and strong inventory turnover. Based on analyst reports, Trulieve is expected to double their revenue in 2021 and generate a 45% EBITDA margin. They currently trade around at a 5.1x 2022 EV-to-Revenue estimates. We feel they are the most attractive operator in the US.

Green Thumb Industries (CSE: GTII)

The second most notable cannabis stock in our view is Green Thumb Industries. This company has built a footprint in 9 states but distributes its products into 12 different states. Green Thumb currently has 50 open dispensaries but has 96 retail licenses. Green Thumb management highlights both Illinois and Pennsylvania as their priority markets. This is due to a large supply-demand imbalance and both markets poised to legalize recreational marijuana in the near term.

Green Thumb is both operational and free cash flow positive; which is our main reason for putting them number 2 on our list. They have beaten analyst revenue and EBITDA estimates for the last few quarters and currently hold the second highest EBITDA run rate with their eyes on taking over the number 1 spot sometime during 2021. Over the last year, Green Thumb has grown quarterly revenues from $75 million to $157 million and they currently trade around 5.2x 2022 EV-to-Revenue estimates. Like Trulieve, analysts expect Green Thumb to nearly double their sales in 2021 with an estimated 35% EBITDA margin.

Curaleaf Holdings (CSE: CURA)

The third most notable in our view is Curaleaf. They are currently the largest multi state operator by both market cap and footprint. Not only are they in 23 states with almost 1.8 million sq feet of cultivation space. Curaleaf’s key markets are Arizona, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania.

Curaleaf has opened 97 dispensaries with 137 retail licenses. They boast the #1 market share in 8 different states and have #2 market share in specific categories in 4 other states.

Ramping operations in various states of this magnitude costs cash, as result, Curaleaf has yet to produce sequential cash flow from their operations as a public company. They have generated 5 consecutive quarters of positive EBITDA with the highest revenue run rate in all of US cannabis. Based on the last quarter revenue of $182.4M, Curaleaf is running at an annual run rate of $729.6 million in topline revenue, almost a 200% increase year over year and currently trades around 5.3x 2022 EV-to-Revenue estimates. Analysts forecast Curaleaf will almost triple their annuals sales in 2021 with a 31% EBITDA margin.

AYR Wellness (CSE: AYR.a)

AYR Strategies went public in 2019 through the SPAC route. This path made them flush with cash and ready to collect great operators under the parent company. Today AYR operates in 7 states with 42 dispensaries, albeit 4 of those states are from pending acquisitions. Of these pending acquisitions, Florida, Ohio and Arizona are expected to close by the end of Q1, while their New Jersey acquisition is expected to close by the end of the third quarter. The most noteworthy one in our view is Liberty Health Sciences, whom they acquired for $290M which came with 28 dispensaries across the state of Florida.The company states that Florida and Pennsylvania will be their core markets moving forward.

Although AYR has a limited operational history, they have produced positive operating cash flow since inception. AYR has grown revenues to $45 million as of the most recent quarter, an increase of 61% quarter over quarter. They currently trade around 2.7x 2022 EV-to-Revenue estimates. And thanks to those great acquisitions, analysts expect Ayr to almost triple their annual sales with around a 36% EBITDA margin.

Cresco Labs (CSE: CL)

Cresco Labs currently has operations in 9 states with all the key jewels including Florida, New York, Illinois and California. They currently operate 20 dispensaries, and that number is about to escalate dramatically with their recent acquisition of Dive favourite Brady Cobb’s Bluma Wellness. This acquisition is expected to close by the beginning of the second quarter.

Cresco also has their products in over 800 dispensaries.

In their most recent quarter, Cresco had over $153M in revenue and stated an adjusted EBITDA figure of $46M. They currently tradesaround 4.5x 2022 EV-to-Revenue estimates and analysts expect Cresco to double their sales in 2021 with a 32% EBITDA margin.

TPCO Holdings (NEO: GRAM)

The last company I wanted to mention here is formerly named Subversive Capital , now referred to as The Parent Co. TPCO is interesting in that they are the largest operator in the largest state: California. They have partnered with Jay Z doing a 50/50 JV with his cannabis company Monogram. TPCO is flushed with cash on their balance sheet following the redemption period for their SPAC. The consolidated California operation is expected to close out 2020 with $185M in revenue and the company states in their marketing materials, they expect combined pro forma revenues of $334 million in 2021.

We believe that the company has the nucleus plus cash to quickly build a first tier MSO through M&A. They have the right people, balance sheet, and fundraisers inside the company to quickly be considered amongst the top 3 operators in the US.

Overall Thoughts

Its very challenging to find analogues between what we saw with cannabis stocks in 2017-18 in Canada to what we see today. US cannabis stocks have much more growth opportunity in front of them. Some of which already do what Canadian names can’t figure out; generate a profit. Our thoughts are that if you are looking for the lowest risk opportunity, the best in class operators are the way to go. And all of the companies we just mentioned are worth considering.

Thank you for joining us on our first edition of the The Dive Video Essays.

The author has no securities or affiliations related to any organization mentioned. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

FULL DISCLOSURE: TPCO Holdings is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover TPCO Holdings on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.

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