GTBIF - Green Thumb: Nothing Spectacular Needed

• Green Thumb reported a solid quarter, easily surpassing analyst targets.
• The MSO has started seeing a boost from New Jersey recreational cannabis sales, and both Connecticut and New York are around the corner.
• The stock remains incredibly cheap at 7x forward EBITDA targets.

The cannabis multi-state operators (MSOs) are so cheap now the quarterly results don't need to be spectacular to justify much higher prices. Green Thumb Industries ( GTBIF ) delivered the type of quarter to satisfy the requirements for higher stock prices. My investment thesis remains ultra-Bullish, with the MSO stock trading at a very low multiple of EBITDA.

Good Enough

Despite massive headwinds in the consumer space due to rising costs and pressures on consumer wallets, Green Thumb grew Q2 revenues 5% sequentially . The MSO actually beat analyst revenue targets by nearly $6 million and reached quarterly revenues of $254 million.

Green Thumb is now officially on a $1 billion annualized revenue run rate, but the stock hardly has a market cap above $2 billion now. The results over the last few quarters haven't exactly blown away expectations, but the catalysts to drive sales much higher in the future are still playing out.

The company launched recreational cannabis sales in New Jersey during the quarter, providing a lot of the boost to the sequential sales gains. The initial hope was for some larger revenue boosts, but Green Thumb only grew sales by ~$12 million sequentially.

Green Thumb reported pricing pressure in the following states: Maryland, Nevada, Massachusetts, and Pennsylvania. The Q2'22 numbers are more impressive, considering these pressures didn't come close to destroying margins in the process.

The MSO reported gross margins at a solid 49.5% (a 120 basis point shift in costs hit gross margins), right near the long-term target of 50.0%. The adjusted EBITDA target returned back above 30% to reach 31.0%.

Adjusted EBITDA reached $79 million, up from just $67 million last quarter. The number will be volatile on a quarterly basis due to when markets open up and where Green Thumb invests to launch a new recreational cannabis market.

In essence, the company was able to absorb a lot of the price pressure and inflationary costs due to macro issues and still report impressive margins. Remember, the MSO still isn't maxing out margins due to states such as Connecticut, New York and Virginia still building towards recreational cannabis launches in future time periods. Green Thumb has to support current medical markets while building for the eventual launch of recreational markets pressuring near-term margins in the process.

The Federal government is definitely getting more aggressive in looking for an actual solution to approve cannabis legislation. Senate Majority Leader Schumer finally submitted his Cannabis Administration Opportunity Act bill a couple of weeks ago and Sen. Booker finally appears willing to entertain a SAFE Banking Plus bill knowing the difficulty of approving the CAOA bill. What isn't clear is how far the SAFE Banking Plus bill would have to move towards criminal justice reform to get approved, but either way, Schumer and Booker are definitely feeling the pressure to get some cannabis legislation done.

Not Priced For Catalysts

Despite all of the obvious catalysts with the New Jersey market still set to grow 7x in the next couple of years to reach maturity of $2 billion in sales and New York ready to add another $5 billion in total sales to the market, Green Thumb trades like a stock going out of business. The price has fallen dramatically to below $10 here while the forward EV/EBITDA multiple is only 7x.

Green Thumb just grew revenue at 15% YoY, and normally a stock with such catalysts described above would at least trade at multiples of EBITDA above the growth rate. The MSO trading at 20x forward EBITDA targets would be normal, and a stock with such catalysts might see the market reward the company with a premium multiple.

The company isn't without risks due to the constantly shifting regulatory environment, and the net debt is now up to $108 million. Green Thumb has a cash balance of $145 million and operating cash flows to provide some financial security in a recession, unlike some smaller operators that might lack the capital.

Takeaway

The key investor takeaway is that Green Thumb is so cheap now the MSO didn't need a spectacular quarter to warrant buying the stock. Considering the retail environment, the company delivered a rather impressive quarter, easily topping analyst targets. The worse is definitely behind Green Thumb.

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