GTBIF - Green Thumb: Survive To Thrive

2023-05-04 14:17:05 ET

Summary

• Green Thumb Industries reported a mixed Q1 as the cannabis market remains tough.
• The MSO remains highly profitable and cash flow positive, especially when stripping out the 280E taxes.
• Green Thumb stock is cheap at 6x adjusted EBITDA, setting the company up to thrive when the cannabis market improves.

The cannabis space remains a tough space for investors, but multi-state operators (MSOs) continue to report solid results. Green Thumb Industries Inc. ( GTBIF ) remains a leader in the space and one of the stocks that have held up the best in the ongoing selloff. My investment thesis remains ultra Bullish on the stock, with the company producing solid cash flows despite the tough operating environment in the cannabis sector.

Squeezed For Now

The cannabis space has been squeezed by both pricing compression and inflationary pressures on input costs. The best possible outcome is that the lack of progress from the federal government and limited access to capital in the sector will reduce the competitive pressures in the sector going forward.

For Q1'23 , Green Thumb continued to report tepid growth metrics, with revenues only growing 2% in the period to reach $249 million . Though, the company reported impressive adjusted EBITDA growth, hitting $76 million during the quarter for a margin of 31% and a 300-basis point improvement over last Q1.

The MSOs are facing a tough period due to regulators in states such as New York blocking their advancement into recreational cannabis. The end result has been a temporary pause in sales growth in the cannabis market, with $22 billion in sales during 2022 and still set to reach at least $71 billion by 2030.

The impressive part about Green Thumb is that the MSO already is reporting positive net income due to $44 million in operating income. The company turns the $9 million in net income into EBITDA of $67 million, due primarily to $34 million in income taxes (280E) and $24 million in depreciation and amortization charges.

The company generated $78 million in operating cash flow due to the majority of the above charges being non-cash in nature and Green Thumb not making a tax payment during Q1. The MSO had about $2 million in net interest expenses that would impact cash flows, but otherwise these charges don't impact cash flows.

While depreciation charges are clearly a cost of running a business with production facilities and retail stores, Green Thumb doesn't need to spend aggressively on capital spending. The MSO forecasts continuing to spend aggressively on facility investments in New York, New Jersey, Minnesota, and Virginia to wrap up existing programs.

Green Thump spent $65 million on capex during Q1. The company forecasts spending another $100 million on capex this year, leading to a total spend of ~$165 million in 2023 before a slowdown in 2024.

The need to build more facilities would only come along with additional sales opportunities. Most companies won't feel the pressure to build new cultivation assets due to smaller competitors lacking the capital.

The combined depreciation/amortization expenses are running at a $100 million annual clip here. Green Thumb is spending about $65 million in excess of net costs here. The MSO will start winding down the facility building in 2024 and already has $620 million worth of property and equipment, building a fortress that only a few other MSOs can match.

Not The Cheapest

Green Thumb Industries Inc. lists a diluted share count of 238 million, placing the market cap at $1.8 billion. Green Thumb is running at a $300 million annual adjusted EBITDA clip, placing the stock at only 6x EBITDA targets.

A lot of MSOs trade at lower multiples, but Green Thumb has less risk with the company already producing positive net income and with net debt below $100 million. The cannabis market is definitely tough here, but the MSO has the potential to grow the business in the 2H of the year.

Green Thumb has 15 retail stores to open this year, with at least 10 of the dispensaries poised to be opened in the 2H. In addition, the above cultivation facilities will open towards the end of 2023 and the MSO has the benefit of recreational cannabis opening up in Maryland on July 1.

All of these data points point towards Green Thumb actually growing the business in the 2H, but the cannabis market is tough to predict right now. Analysts do forecast quarterly sales to push towards $300 million over the next year.

Takeaway

The key investor takeaway is that a lot of cannabis stocks offer cheap valuations here. Green Thumb Industries Inc. is one of the safer picks, with the strong balance sheet and a business already throwing off net income despite the heavy tax burden from 280E.

Investors should use weakness to continue building positions in this MSO, with the cannabis market poised to grow over the next decade and GTBIF stock trading as if Green Thumb Industries Inc. is going out of business.

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