Green Thumb (GTBIF): Ignore Noise

Stock Market


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Only in the US cannabis space would investors sell a stock at yearly lows heading into the launch of multiple new markets larger than most existing markets where a company currently operates. Green Thumb Industries (OTCQX: GTBIF) is a leading MSO (multi-state operator) poised for years of strong growth ahead, even without Federal approval, yet the stock is now at yearly lows. My investment thesis is ultra Bullish on the stock trading at a very low multiple of future growth rates.

Just Noise

Even in a recently tough environment due to a lack of new markets opening up for recreational cannabis, Green Thumb reported a strong quarter with Q4’21 revenues rising 4% sequentially to $ 243.6 million. In total, the company grew revenues over 60% during the year to reach $ 893.6 million.

The large MSO ended the year on a run rate to easily top $ 1 billion in annual sales, considering the closing of the acquisition of LeafLine Industries in Minnesota on December 30. Not to mention, Green Thumb is now poised for massive growth as Northeast states open up recreational cananbis sales in the next few years.

New York, Connecticut and Virginia all have plans for recreational cannabis sales in the 2023 to 2024 timelines while New Jersey is expected to launch soon. According to Marijuana MomentNew Jersey could launch recreation cannabis within the week providing a huge growth jolt for Green Thumb in the limited license state.

US Map slide

Source: Green Thumb January presentation

Instead, the market is focused on short-term revenue issues with covid hits and seasonal timing causing some pricing pressure after a strong December. On the Q4’21 earnings call, CEO Ben Kovler made the following statement about January sales in their home state helping cause the large sell off following call:

So while Illinois saw sales volume decrease in January, December was a record month and for the full year 2021 total sales 67% to $ 1.8 billion year-over-year.

The CEO had already discussed a competitive pricing environment with the EBTIDA margin outlook of at least 30% in the future. Regardless, the market always chooses to focus on the noise and extrapolate weaker numbers too much into future results. Green Thumb had already discussed lower margins as the company expands into new states and long before all of these Northeast states launch recreational cannabis programs.

For Q4’21, EBITDA margins were 31.2%, down from 36.9%. Margins for 2021 were 34.5%. Green Thumb produced $ 307.8 million in adjusted EBITDA for the year for impressive 71% growth, even with the lower margin hit during the year.

Adj.  EBITDA table

Source: Green Thumb Q4’21 earnings release

The MSO produced operating cash flows for an eighth consecutive quarter is another sign of the disconnect with the actual business and the stock price.

Buy An MSO

At this point, most of the MSOs are extremely cheap. Investors need to be invested with which ever company is the preferred one in the sector.

In the case of Green Thumb, the stock has a market valuation of only $ 4.5 billion. The MSO is one of the largest in the sector with sales targets in the $ 1.1 billion range next year placing the company far above Canadian cannabis companies.

The stock is already extremely cheap based on 2021 EBITDA total and the consensus estimate now has the stock trading at a forward EV / EBITDA multiple of 10.6x 2022 EBITDA targets in the $ 400 + million range. The multiple has fallen more than 50% in the last year.

Chart
Data by YCharts

These EBITDA numbers are before huge revenue gains in 2023 and 2024 from these other Northeast states launching recreational cannabis. Green Thumb should see some solid efficiencies of scale over these years to counter know scenarios where pricing will become more competitive.

With just stable adjusted EBITDA margins, the large MSO could easily double EBITDA over a 2 to 3 year period. Normally, a company with the ability to double already sizable EBITDA over a 3 year period trades at a premium valuation. Right now, the stock trades in the value arena where slow growth companies trade.

Takeaway

The key investor takeaway is that Green Thumb reported another solid quarter and any sell off is due to the market focusing on the noise in the cannabis sector. The large MSO should benefit from launching recreational cannabis within weeks finally providing the beginning catalyst for the next move higher in the sector.



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