TCNNF - Trulieve Cannabis: Brighter Days Ahead

2023-11-16 15:43:08 ET

Summary

• Trulieve Cannabis Corp. has several catalysts with the approval of recreational cannabis in Ohio and recommendation for the re-scheduling of cannabis at the Federal level.
• The company is focused on improving cash flows rather than pure revenue growth, leading to a meaningful improvement in financial results.
• The stock trades at only 3x adjusted EBITDA targets.

As with all of the cannabis stocks, Trulieve Cannabis Corp. ( TCNNF ) trades close to the lows despite now generating solid cash flows and repurchasing debt on the cheap. The cannabis space still remains in limbo, with tons of uncertainty surrounding federal legalization, but the sector still has a lot of catalysts. My investment thesis is ultra Bullish on the MSO (multi-state operator) stock.

Better Quarters Ahead

Trulieve Cannabis has spent the last year focused on improving cash flows versus pure revenue growth. The CEO made the following statement on the Q3'23 earnings call regarding the current results:

For Trulieve, the timing of these developments couldn't be better. Just as the outlook for U. S. Cannabis has brightened, all the steps we have taken to strengthen our competitive position are driving a meaningful improvement in financial results.

The MSO reported Q3 revenues actually dipped 7% to $275 million . The more important quarterly cash flow generation jumped to $93 million with adjusted EBITDA reaching $78 million.

The key is that Trulieve no longer needs to build aggressive cultivation facilities allowing tons of cash to drop to the bottom line. The weak cannabis market will turn into a benefit for corporations that have already built assets with funding for new assets very limited.

The business should continue producing tons of cash flows, with over $41 million in depreciation and amortization costs hitting the quarterly results. Trulieve has $686 million in property and equipment, and another $1.4 billion in intangible assets and goodwill that will be depreciated or amortized over time. These numbers combine to slash reported profits, but these non-cash charges don't impact cash flows.

The MSO burned $22 million in cash flows from operations last Q3 and spent another $38 million on capital expenditures. In total, Trulieve burned $59 million worth of cash last Q3 while the business generated $87 million in free cash this Q3 leading to an incredible $146 million shift in cash flows in a period where revenues actually fell 7%.

Solid Future

The MSO has a business very reliant on states without recreational cannabis. Trulieve just entered Ohio with a medical cannabis store in Columbus, and the state just approved recreational cannabis while Maryland started adult-use cannabis on July 1. The key markets of Florida and Pennsylvania are both poised to approve recreational cannabis at some point in the near future.

MJBizDaily forecasts Ohio to become a $1.5 to $2.0 billion cannabis market next year growing to $3.5 to $4.0 billion in 4 years, or roughly 2027. In addition, the federal government is poised to re-schedule cannabis to level 3. The FDA re-scheduling cannabis to Schedule 3 from Schedule 1 would remove the punitive tax burden of Section 280E providing a substantial boost to cash flows.

The cash position should get even better with $143 million in federal tax refunds. Trulieve has a $200 million cash balance , with $582 million in outstanding debt plus $205 million in deferred tax liabilities.

On the Q3'23 earnings call, CEO Kim Rivers discussed the efforts to remove the 280E taxes and only pay U.S. income taxes:

In a separate development, Trulieve filed amended federal tax returns for several entities in October for the years 2019, 2020, and 2021, claiming a total refund of $143 million for taxes already paid. The amended returns are supported in part by a challenge to Trulieve's tax liability under Section 280E of the Tax Code. While the refund claims are under review, Trulieve intends to make tax payments as a customary U.S. taxpayer without tax liabilities associated with 280E.

Trulieve suggests the tax adjusted cash flows from operations are $184 million YTD. The company forecasts operating cash flows of $100 million for the year.

Due to the complicated tax position, the stock is best valued based on adjusted EBITDA. Trulieve Cannabis has produced $235 million in adjusted EBITDA on a path to ~$300 million for the year with a stock valuation of only $1 billion.

Takeaway

The key investor takeaway is that MSO stocks like Trulieve Cannabis remain cheap. The company is now generating solid cash flows, with the stock trading at only 3x adjusted EBITDA, while upside potential exists with additional states approving recreational cannabis.

Investors should continue using weakness to load up on Trulieve Cannabis Corp. shares.

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