Company Reports

Shares of Canadian-licensed producers and US multistate operators rallied massively on news that the US Drug Enforcement Administration will proceed with rescheduling cannabis to Schedule III from Schedule I. Schedule I indicates it is considered to have a high potential for abuse and no medical value. In comparison, Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. We view the April 30 news as the next step in a long process by the Biden administration to relax the current federal prohibition. We view the market reaction as a reflection of how much pressure these stocks have faced rather than any new development.

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated, as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 14 states through 20 production facilities, and 92 dispensaries. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

No-moat Green Thumb’s fourth quarter exceeded our expectations, especially from a profitability perspective. While fourth-quarter revenue was roughly flat sequentially, the adjusted EBITDA margin expanded by about 300 basis points to an impressive 33%, the highest margin ever achieved. Impressively, improvement at the gross margin level indicates that at least some of it is due to operational improvements. As we forecast the adjusted EBITDA margin to approach the mid-30% range on a run-rate basis, we don’t expect to significantly change our long-term forecasts or fair value estimates of $26 and CAD 36 per share.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 18 production facilities, and 87 dispensaries. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

No-moat Green Thumb’s third quarter saw a return to healthy top-line growth, with third-quarter revenue of $275 million representing 9% growth sequentially and 5% over the prior-year quarter. We don’t expect a lot of changes to our model except for increasing our overhead expenses forecast to reflect year-to-date growth. This is likely to lead to a reduction of a couple dollars to our fair value estimates of $28 and CAD 38 per share. Shares are well undervalued, as we think the market remains overly focused on the lack of progress around easing federal prohibition. Meanwhile, we see tailwinds from additional states legalizing adult use following Ohio’s successful referendum, with states like Florida planning votes in 2024.

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.

We were disappointed by no-moat Green Thumb’s second-quarter revenue, which grew just 2% sequentially and declined 1% year over year to $242 million. The company’s six new stores opened during the quarter (now 84 total stores) was offset by same-store sales declining 3%. This fits with the price compression management cited that continues to weigh on top line growth.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 18 production facilities, and 84 dispensaries. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

Price compression continued to weigh on top-line growth in no-moat Green Thumb’s first quarter, as revenue fell 4% sequentially to $249 million. This accelerated from the fourth quarter’s 1% decline as challenging economic conditions and a stubborn illicit market continue to pressure prices. Inflation has been a particular challenge, not just from a cost perspective but from cannabis’ competition for consumers’ share of wallet. On the bright side, Green Thumb sold more volume through more dispensaries as the legal cannabis market expands. Additionally, profitability remained intact with adjusted EBITDA margins virtually unchanged from the fourth quarter at roughly 31%.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 18 production facilities, and 79 dispensaries. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

Green Thumb's results remained solid though price compression weighed on the fourth quarter. As such, revenue declined 1% sequentially to $259 million and adjusted EBITDA margin narrowed about 100 basis points sequentially to 31%. We anticipated current economic conditions and pricing dynamics to weigh on the fourth quarter, so results were within our expectations. Our long-term outlook remains unchanged as we continue to expect Green Thumb to benefit from widening legalization and organic growth in already-legalized states. Our fair value estimates of $45 and CAD 61 per share are unchanged for no-moat Green Thumb. Shares remain very undervalued as we think the market misconstrues the near-term growing pains and lack of progress on changing federal prohibition as indications of the legal market's long-term potential.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 18 production facilities, 77 stores, and seven brands. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

Green Thumb’s results held up well into the third quarter, as highlighted by extended sequential improvement in both sales and EBITDA despite the continuing inflationary environment. Revenue increased 3% sequentially on continued demand growth in adult-use markets and strong retail sales in new stores, following the 5% revenue jump that solidified the second-quarter rebound. This drove adjusted EBITDA margin to 32%, compared with 28% in the first quarter. We’ve slightly trimmed our full-year revenue forecast to about $1 billion from $1.1 billion on slower-than-expected store openings in the back half of the year. However, this is immaterial to our unchanged fair value estimate of $45 for the no-moat firm. Green Thumb’s Canadian fair value estimate rises to CAD 61 from CAD 58 on a stronger U.S. dollar. Shares remain very undervalued as the market appears to underestimate the potential size of legal sales.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 17 production facilities, 77 stores, and six brands. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

President Joe Biden’s comments on cannabis legalization spurred a rally in the cannabis sector on Oct. 6. His major announcement was that all prior federal offenses of simple marijuana possession will be pardoned. The act is expected to affect approximately 6,500 people convicted from 1992 to 2021. Additionally, Biden called upon governors to take similar action toward pardoning possession offenses. More importantly for the legal cannabis industry, he plans to direct the Department of Health and Human Services and attorney general to review the product’s status as a Schedule 1 controlled substance, which places it among heroin and LSD and higher than methamphetamine and fentanyl.

Inflation pressure weakened in Green Thumb’s second quarter, leading to stabilization in sales and margins compared with the contraction in the first quarter. Revenue was up 5% sequentially, buoyed by sequential comparable growth of 10%. This compares with flat first-quarter sequential revenue growth and a 6% decline in sequential comparable sales as inflation pressured cannabis’ share of wallet. Adjusted operating EBITDA margin recovered nicely to 31%, after having shrunk massively to 28% during the first quarter. We’ve made slight adjustments to our forecasts, but not enough to change our U.S. dollar-denominated fair value estimate of $45 per share for no-moat Green Thumb. Our Canadian dollar-denominated fair value estimate rises to CAD 58 from CAD 57 on exchange rate changes.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 17 production facilities, 77 stores, and six brands. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.

Inflation was a problem in Green Thumb’s first quarter, both in higher costs and lower volumes as cannabis battled for the customer’s wallet share. As inflation stabilizes, we think volumes can recover. But higher costs will linger as a black market that faces different costs and motivations prevents the legal market from passing all inflation onto customers. We now forecast long-term adjusted EBITDA margin of 37%. We previously forecast 44%, compared with a 2021 margin of 34% and first quarter of 28%. Our fair value estimates fall to $45 and CAD 57, down from $55 and CAD 70 for no-moat Green Thumb.

Green Thumb Industries cultivates and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. Unlike its Canadian peers, the firm is more vertically integrated as it owns dispensaries in addition to the cultivation and processing of value-added products. It has a presence in 15 states through 17 production facilities, 76 stores, and six brands. In states with more mature cannabis markets, Green Thumb believes there are enough cultivators available and purchases cannabis from third parties. This helps reduce capital intensity for expansion without sacrificing exposure to widening legalization.