Trulieve Is Still Not a Good Cannabis Stock (OTCMKTS:TCNNF)

In March I downgraded Trulieve (OTCQX:TCNNF) from “hold” to “sell” and received a lot of flak from readers questioning my thinking. After all, we were on the road to cannabis regulation change and Florida voters getting a chance to vote. In November, adult-use marijuana will become legal in the state. The stock price should have benefited from the DEA’s announcement recommending that marijuana be moved from Schedule 1 to Schedule 3, and the Florida Supreme Court’s ruling that voters can actually vote to legalize marijuana in November. But no, Trulieve’s stock price has fallen since this article!

Of course, the stock still has a lot of upside potential in 2024. I would like to avoid the same decline that Trulieve experienced. Since I started sellingbut I don’t add We have not yet incorporated it into our model portfolio. In this follow-up, we discuss the first quarter reported in May, share analysts’ latest outlook, look at charts, and assess valuation.

Trulieve Beats Expectations in First Quarter

On May 8, Trulieve reported its first quarter results. Analysts were expecting the company to generate $286 million in revenue and $82 million in adjusted EBITDA, both of which were higher than expected when the company was about to report its fourth quarter results. Trulieve beat these high expectations. Revenue was $298 million, up 4% quarter-over-quarter and 4% year-over-year. Adjusted EBITDA was $106 million, up 21% year-over-year and 35% quarter-over-quarter.

Better-than-expected revenue grew just 4% year over year, better than most of its peers. Gross margins were a healthy 58%, up from 54% a year ago and 53% in the fourth quarter. Florida is where Trulieve generates the majority of its revenue, and because the state is vertically integrated, it has higher gross margins than other states where it does wholesale. Overall, 96% of Trulieve’s revenue comes from retail sales. 69% of its stores are in Florida.

Operating cash flow was $139.2 million, up from $0.4 million a year ago. Capital expenditures were just $15.6 million, and free cash flow was $123.6 million. Investors need to understand what drove this improvement in cash flow; it’s more than just improved profitability. Much of it was due to tax-related issues, with “uncertain tax position liabilities” increasing by $97.6 million. Deferred taxes increased by $10 million. A year ago, cash flow was down $7.9 million.

The balance sheet looks improved, but that’s due to tax assumptions. Cash increased $119 million from the end of the year to $320.3 million. The company still has a lot of debt, ending the quarter with net debt of $162.1 million. Liabilities do not include $278 million in uncertain taxes and $218 million in unpaid and deferred income taxes. The current ratio (current assets divided by current liabilities) was high at 5.0x. Tangible book value was slightly negative. Assuming the in-the-money option is exercised, it would only go up to $4.7 million. This is not good, but there are many large MSOs with negative tangible book values.

Trulieve’s outlook improves

Prior to the first-quarter report, analysts were forecasting growth going forward, according to Sentieo. For 2024, the consensus was for revenues of $1.152 billion and adjusted EBITDA of $330 million. For 2025, 10 of 14 analysts were forecasting revenues of $1.224 billion and adjusted EBITDA of $348 million.

Following a better-than-expected first quarter, analysts now expect revenue to rise 5% to $1.182 billion and adjusted EBITDA to rise 16% to $374 million.

Looking ahead to 2025, 13 analysts expect revenue to grow 5% to $1.245 billion and adjusted EBITDA to $383 million.

In short, all of these forecasts are improvements: the forecast adjusted EBITDA margin for 2025 is 30.8%, down significantly from 2021 (41%).

These estimates could be subject to significant change if Florida, where most of Trulieve’s revenue comes from, legalizes marijuana for adult use. I follow Florida’s medical marijuana market closely, as the state releases data on a weekly basis. Week ending May 30In 2018, data showed the growth rate of medical marijuana patients was the lowest on record at 7.0%. The good news is that it’s still growing. The state doesn’t release revenue figures, but they’ve done a great job sharing company-level information on dispensary counts and sales. Trulieve accounts for 21.3% of dispensaries in the state and has the leading market share for THC products (31% of sales in the past week) and smokable flower (38% of sales in the past week).

According to data provided by BDSA, the Florida market has been growing very slowly. In March, the last month the company reported, cannabis revenue in Florida grew just 1.8%, lagging behind both patient and sales growth. Store counts are also expanding more rapidly. Clearly, the maturing medical cannabis market is becoming more competitive and driving down prices. The Florida-focused company’s lower adjusted EBITDA margins reflect pricing.

If Florida voters approve adult-use cannabis (a 60% vote is needed to pass), sales will obviously increase, but I think it’s hard to predict exactly how much. The medical cannabis market in Florida is large and mature, and people who really want cannabis already have it. Of course, the state gets a lot of tourism, but tourists don’t go to every location with dispensaries. If cannabis is legalized for adult use, dispensaries near tourist locations will benefit. Investors should look at each provider and see how their locations are doing.

Trulieve charts appear to be at the top

Trulieve is up 87.7% in 2024, despite a steep decline since April 30. The New Cannabis Ventures Global Cannabis Stock Index is up 16.5% year to date, which is better than the NCV American Cannabis Operator Index, which is currently up 12.3%. The stock hit an all-time low before rumors of a DEA rescheduling hit the market in late August, closing at $3.45 on August 28th. It is up 183% since then. The American Cannabis Operator Index is up 53% since August 28th.

I haven’t been bearish on Trulieve stock for long — in fact, I was very bullish on it when I first wrote about it about a year ago. Great entryAt the time, the stock price was $3.87. After the stock price rose in November, I Reiterating my bullish stance I upgraded the stock from “buy” to “hold” in mid-January after the stock price rose to $5.61. Cheap, but possibly riskyAt the time, the price had risen to $6.78. I first placed a “sell” order in March, when the stock price was up 127% year to date at $11.85.

I didn’t have a “buy” article at the bottom, but the two articles I wrote (one before the bottom and one after, both with “buy” ratings) did very well. A “neutral” would have been a reasonable decision at the time, but maybe I should have waited a little longer. The “sell” article was premature, as the stock spiked on April 30, the day it was confirmed that the DEA would be proposing changes to marijuana regulations. It’s now down.

When I switched from Buy to Neutral, I noted the gap trading near $6 since mid-January. I no longer believe this gap is necessarily filled. I see support at $7 above that. In fact, I think the stock could bottom in the $8 range. I see resistance at the descending 50-day MA of 11.52 and above.

Looking at the long-term trade, it’s clear that Trulieve has historically been a much more favorable stock than it is now.

First, note that the recent high was lower than the early December 2022 spike. I know many traders and investors look at past highs and imagine the stock can recover. Sure, Trulieve could get back to the $50 range, but this is not my prediction for at least the next 5 years. I share my end of the year target below, but if I raise my projected valuation substantially and Trulieve can grow more rapidly, it could eventually get there. If you take the projected 2025 Adjusted EBITDA and multiply it by a 20x multiple assuming it grows at 15% for 5 years, it will hit the high $70s by the end of 2029, so it is possible. I think the multiple is probably too high and I don’t think the growth will be that high either. A 15x multiple with 10% growth won’t get you to $50.

Trulieve is a wholly owned subsidiary of Cresco Labs.OTCQX:CRLBF), Curaleaf (OTCPK:CURLF), Green Thumb Industries (OTCQX:GTBIF) and Verano Holdings (OTCQX:VRNOF), and has risen significantly since the day before, when shares soared on rumors of rescheduling on August 29th (the day the Department of Health and Human Services recommended the DEA move it from Schedule 1 to Schedule 3).

Both are up significantly, but not as much as Trulieve, which appears to have benefited from speculation that adult-use marijuana may be legalized in Florida, which is more evident in the year-to-date chart.

Verano, the stock, is actually down in 2024. It’s down substantially since I said that in mid-April. Not a bargain.

Taking a longer-term view, Trulieve has kept pace with its peers since the end of 2020.

Trulieve has good reviews

When I last wrote about Trulieve and initiated a “sell” rating in March, I had a target of $16.65 in an optimistic scenario, with an even lower target if cannabis rescheduling did not occur, based on an enterprise value of 10x projected 2025 adjusted EBITDA.

I don’t know if the DEA will actually be successful in rescheduling and repealing the 280E tax, but I’m currently setting my target under the assumption that it will happen. In a preview of the Q1 report, I shared a revised target of 8x with members of my investment group, which was $13.12 at the time.

At the higher estimate, using 8x, we get $14.90, which is 52% higher than the current price of $9.78 and above the third resistance level. Of course, 8x may be too low, but note that the average current ratio for Tier 1 MSOs is 7.6x 2024 EV/Adjusted EBITDA.

Looking out to 2025, Trulieve has the lowest ratio, at just over half of Curaleaf’s valuation. I recently upgraded Green Thumb Industries to Neutral from Sell and maintain a Strong Sell on Curaleaf.

So Trulieve’s valuation is fair. But my problem is that it’s not that much better than its peers, except for Curaleaf. But to make matters worse, there are some Tier 2 stocks that are a lot cheaper. One that stands out is Ascend Wellness (OTCQX:AAWH),In other words Slightly increased purchases 2024. For those who want to invest in the possibility of adult-use cannabis legalization in Florida, Planet 13 continues to offerOTCQX:PLNH) was the last one I wrote, about three weeks ago. Best American Cannabis Strains.

Conclusion

As we said, Trulieve has a lot to offer. But it’s expensive. There are risks, like Florida not legalizing it for adult use. And of course, the company has taken an aggressive stance on taxes, which could force it to cough up some cash.

The DEA’s move to change regulations has made me more positive on cannabis stocks, but the end game is not over yet. For the optimists, I think MSO has better options than Trulieve and some of the ancillary products make more sense. Prices are coming down, but I still think Trulieve should be sold and replaced.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.