Aleksandr_Kravtsov/iStock via Getty Images Recently, Trulieve Cannabis ( OTCQX:TCNNF ) wasn’t an appealing cannabis stock to own due to its reliance on the suddenly competitive Florida market. The Harvest Health & Recreation deal plus a hit to the stock price has solved a lot of the prior lack of interest in the stock. My investment thesis is now far more Bullish on Trulieve Cannabis moving forward due to the sector weakness. Diversification
Despite some minor moves into other states, Trulieve Cannabis entered 2021 with the vast majority of revenues from the Florida market. Before closing the Harvest Recreation deal on October 1, the MSO (multi-state operator) had 91 out of 101 operational stores in the Sunshine state.
Harvest Health added over 40 dispensaries with a prime focus on the recreational cannabis market in Arizona along with the medical cannabis market in Pennsylvania. Trulieve Cannabis now has 159 stores open with 111 stores in Florida now due to opening new stores in the state plus the 14 additional locations of Harvest Health.
The cannabis MSO hasn’t eliminated their reliance on the medical cannabis market in Florida, but Trulieve Cannabis now has regional hubs in the Northeast and Southwest to provide a level of diversification. Both regions struggle to match the scale of Florida with an estimated annual sales rate topping $750 million now due to 111 medical dispensaries in the state with flower sales equivalent to nearly half the whole $1+ billion Florida market with sales forecast to head to $2 billion by 2025. Trulieve Dispensary Map Ultimately though, Trulieve Cannabis only has 17 retail dispensaries in Arizona with the Pennsylvania market having a similar 18 medical dispensaries. These two markets only combined for 35 stores whiles Florida has 111 stores. Even with the new stores added in Q4’21, the MSO added 7 locations in Florida with only 4 stores added in non-Florida markets including 2 medical dispensaries in West Virginia.
Based on Q3’21 numbers , Harvest Health added about $368 million in annual revenues at the time the deal closed. The MSO also added 50.8 million shares to the business. Market Normal Model
Prior to the Harvest Health deal, Trulieve Cannabis wasn’t much more than a single-state operator in Florida. The focus on one strong state lead the MSO to have industry leading margins topping 50% at one point and coming in at 43.7% in Q3’21.
Harvest Health was much more diversified and along with Trulieve Cannabis expanding into other states. The company guided to combined Q3’21 revenues of $316 million with adjusted EBITDA of just $121 million.
The Arizona focused MSO added $96 million in quarterly revenues with adjusted EBITDA of only $23 million. Harvest Health only had EBITDA margins of 24% leading the combined company to have adjusted EBITDA margins down at 38%.
Trulieve Cannabis is now more derisked as investors aren’t worried about paying up for an irrational view on the productivity of the management team. Also, investors can value the stock based growth going forward with less risk of giving back EBITDA.
The company has ~180 million shares outstanding and now trades with a market valuation of just $3.6 billion. Based on a run rate adjusted EBITDA in the $500 million range, Trulieve Cannabis only trades at ~7x EBITDA.
With EBITDA margins more in line with the market now, investors aren’t as worried about buying the stock into declining margins. The biggest worry is still the competitive position in Florida.
According to the latest OMMU data for the week of January 28, Trulieve Cannabis only controls slightly above 25% of the medical dispensaries in Florida while controlling ~50% of the flower sales. Smaller MSOs such as Ayr Wellness ( OTCQX:AYRWF ) and Red White & Bloom ( OTCQX:RWBYF ) are well documented as having bought licenses in the state lacking cultivation supplies to effectively run stores. These smaller MSOs are quickly ramping up cultivation and opening new stores.
Trulieve Cannabis still faces a scenario were logical market share losses in Florida could cut growth rates for years. If the MSO can’t grow in Florida, the other states won’t be able to pick up much slack at somewhere around 30% of the business. Takeaway
The key investor takeaway is that Trulieve Cannabis is now a value play with reduced risk from diversifying away from the higher margins of the Florida market. The company is now aggressively investing in growing sales outside Florida leading to reduced adjusted EBITDA margins. The MSO still faces the risk of losing market share in Florida, but the stock is just far […]
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