Trulieve Still Not a Good Cannabis Stock (OTCMKTS:TCNNF)

In March, I downgraded Trulieve (OTCQX:TCNNF) from “Hold” to “Sell” and received a lot of criticism from readers questioning my thinking. Ultimately, we were moving toward changing the schedule for cannabis and making sure Florida voters had the opportunity to vote. In November, the state will legalize adult-use cannabis. The stock should have benefited from the DEA’s announcement that it is recommending that cannabis be changed from Schedule 1 to Schedule 3, as well as the Florida Supreme Court’s decision when voters will actually vote in November to legalize cannabis. No, but Trulieve went down after that article!

Of course, stock prices will still rise a lot in 2024. I would like to avoid a decline like the one Trulieve has experienced since initiating a Sell rating, but not add to it. It is not yet included in my model portfolio. In this follow-up, we’ll discuss the first quarter reported in May, share updated forecasts from analysts, and look at the charts to assess valuation.

Trulieve Beat estimates for Q1

On May 8, Trulieve reported its first quarter results. Analysts expected the company to generate revenue of $286 million and adjusted EBITDA of $82 million, higher than the company had expected when it reported its fourth quarter. Trulieve surpassed these high estimates! Revenue increased 4% quarter over quarter to $298 million. Adjusted EBITDA was $106 million, an increase of 21% year over year and 35% quarter over quarter.

Better-than-expected sales were up just 4% from a year ago, better than most of its peers. Gross profit margin was a healthy 58%, up from 54% a year ago and 53% in the fourth quarter. Florida is where a significant portion of Trulieve’s revenue comes from, and the state is vertically integrated, resulting in higher gross margins than other states where it wholesales. Overall, 96% of Trulieve’s revenue was generated from retail sales. 69% of stores are in Florida.

Operating cash flow was $139.2 million, up from $0.4 million a year ago. Capital expenditures were only $15.6 million, so free cash flow was $123.6 million. Investors need to understand the source of this improved cash flow. This is because it means more than just improving profitability. Tax-related issues account for as much, with “uncertain tax position liabilities” adding $97.6 million. Deferred income taxes were added by $10 million. A year ago, cash flow was down $7.9 million.

The balance sheet looks better, but it’s helped by tax assumptions. Cash increased $119 million year-end to $320.3 million. The company still has a lot of debt, with net debt at the end of the quarter being $162.1 million. Liabilities do not include uncertain taxes of $278 million and income taxes paid and deferred taxes of $218 million. The current ratio (current assets divided by current liabilities) was strong at 5.0 times. Tangible book value was slightly negative. Assuming the in-the-money option is exercised, that amount would be only $4.7 million. This is not good, but there are many large MSOs with negative tangible book value.

Trulieve outlook has improved

Ahead of the first quarter report, analysts were predicting future growth, according to Sentieo. The consensus is that in 2024, revenue will be $1.152 billion and adjusted EBITDA will be $330 million. In 2025, 10 out of 14 analysts forecast sales of $1.224 billion and adjusted EBITDA of $348 million.

After first-quarter results, analysts expect revenue to increase 5% to $1.182 billion and adjusted EBITDA to increase 16% to $374 million.

In 2025, 13 analysts expect revenue to increase 5% to $1.245 billion and adjusted EBITDA to $383 million.

Therefore, both of these estimates have improved. The projected adjusted EBITDA margin for 2025 is 30.8%, down significantly from 2021 (41%).

These estimates are vulnerable to potentially large changes if Florida, the source of most of Trulieve’s revenue, legalizes adult-use. I follow the Florida medical cannabis market closely as the state releases data weekly. For the week ending May 30, data showed the growth of medical cannabis patients was 7.0%, the slowest on record. The good news is that it’s still growing. Although the state does not disclose its revenues, it does a fantastic job of sharing company-level information about how many dispensaries and units are sold. Trulieve accounts for 21.3% of the state’s dispensaries and holds leading market share in THC products (31% of products sold last week) and smokable flower (38% of products sold last week).

According to data provided by BDSA, the Florida market is growing very slowly. Last month, in March, Florida cannabis revenue increased 1.8%, which was lower than patient and unit sales growth. The number of stores expanded at an even faster rate. Clearly, the mature medical cannabis market has become more competitive and prices are falling. The Florida-focused company’s low adjusted EBITDA margins reflect its pricing.

If Florida voters approve adult use (60% would need to approve it to pass), sales would certainly increase. But I think it’s difficult to predict exactly how much. The Florida medical cannabis market is large and mature, and people who really want cannabis are already getting it. Of course, the state has a very large tourist base, but tourists do not visit all areas where dispensaries are located. If cannabis becomes legal for adult use, dispensaries near where tourists are will benefit. Investors should look at each provider to see how they are positioned.

Trulieve chart looks strange.

Trulieve is up 87.7% in 2024 despite a sharp decline since April 30th. The New Cannabis Ventures Global Cannabis Stock Index is up 16.5% year to date, which is better than the NCV American Cannabis Operator Index, which is currently up 12.3%. The stock hit an all-time low, closing at $3.45 on August 28, before rumors of a DEA schedule adjustment hit the market in late August. Since then it has risen 183%. The U.S. Cannabis Operators Index is up 53% since August 28.

I haven’t been bearish on Trulieve’s stock for a long time. Actually, I was very optimistic about a year ago. When I wrote my first article, I called it a great article. The stock price at the time was $3.87. After the stock rose in November, when the stock rose to $5.61, I reiterated my bullish stance. In mid-January, I decided the stock was cheap but potentially risky, so I changed it from a “buy” to a “hold.” At that time, it had risen to $6.78. My first “sell” was in March, when the stock was up 127% since the beginning of the year, at $11.85.

I didn’t have a ‘buy’ article at the bottom, but the two articles I wrote (one before and one after the bottom, both rated ‘buy’) did very well. It made sense to go “neutral” at the time, but I probably should have waited. The “sell” story came early, with the stock soaring on April 30, the day the DEA confirmed it would advocate for changes to the cannabis schedule. It’s lower now.

When I went from “buy” to “neutral,” I noted that there had been a trading gap around $6 since mid-January. I no longer believe that this gap will necessarily be bridged. It appears that $7 more is supported than that. In fact, I think the stock could find a bottom in the 8s. Resistance was found at the 50-day moving average of 11.52 and below.

Looking at the long-term deals, it’s very clear that Trulieve has historically been a lot more loved than it is now.

First, note that the recent high was lower than the surge in early December 2022. We know that many traders and investors look at previous highs and imagine that stock prices can recover. Sure, Trulieve could go back to the ’50s, but that’s not my prediction for at least the next five years. I share my year-end goals below, but if I can raise my projected valuation much higher and Trulieve can grow faster, I could eventually get there. If we take our projected adjusted EBITDA for 2025, assume it grows 15% over five years, and apply a 20x multiple to that, we’d be in the low 70s by the end of 2029, so it’s possible. The multiple is likely too high and we don’t expect growth to be that high either. 10% growth and a multiple of 15 will not reach $50.

When we look at Trulieve compared to its four Tier 1 MSO peers, including Cresco Labs (OTCQX:CRLBF), Curaleaf (OTCPK:CURLF), Green Thumb Industries (OTCQX:GTBIF), and Verano Holdings (OTCQX:VRNOF), we see some pretty impressive performance. showed. Since August 29, the day before stock prices soared on rumors of schedule changes (when the Department of Health and Human Services recommended the DEA move from Schedule 1 to Schedule 3):

They’ve all gone up a lot, but not as much as Trulieve. It benefited from speculation that Florida might legalize it for adult use. This becomes even more evident in the year-to-date chart.

The stock Verano actually went down in 2024. Prices have fallen a lot since mid-April when I said they weren’t cheap.

From a long-term perspective, Trulieve has been moving in step with its peers since the end of 2020.

Trulieve’s valuation is not bad

When I last wrote about Trulieve and initiated a “sell” rating in March, the target was $16.65 in an optimistic scenario, with a much lower target if no changes were made to the cannabis schedule. This is based on an enterprise value of 10 times projected 2025 adjusted EBITDA.

I’m not sure if the DEA will actually succeed in rescheduling to repeal the 280E tax, but I’m now setting my sights on the assumption that it will happen. In my Q1 report preview, I shared with my investment group members a revised target of 8X, which at the time was $13.12.

With the higher estimate and still using 8X, you get $14.90. This is 52% above the current price of $9.78 and above the third resistance level. Of course, 8X may be too low, but the average current ratio for Tier 1 MSOs to EV/Adjusted EBITDA in 2024 is 7.6X.

Looking to 2025, Trulieve has the lowest ratio and is just over half of Curaleaf’s valuation. I recently upgraded Green Thumb Industries from “sell” to “neutral” and maintained a “strong sell” on Curaleaf.

Therefore, Trulieve is appropriately valued. But my problem is that it’s not much better than its peers except Curaleaf. But what’s worse is that there are Tier 2 names that are much cheaper. One that stands out is Ascend Wellness (OTCQX:AAWH), which is up slightly in 2024. I continue to recommend Planet 13 (OTCQX:PLNH) to those looking to invest in Florida’s potential adult-use legalization. The last article I wrote about three weeks ago was called America’s Best Cannabis Stocks.

conclusion

As I’ve discussed, there’s a lot of good things happening at Trulieve. However, prices have soared. There are also some risks, including Florida not legalizing adult use. Of course, the company has taken an aggressive stance on taxes and may have to pay some of that cash.

I have become more constructive on cannabis stocks in light of the DEA’s move to reschedule, but the deal is not yet done. For the optimistic, I think there are better choices for MSO than Trulieve, and some of its ancillary features also make more sense. Even though the price is low, I still think I should sell and replace my Trulieve.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.