Trulieve: Why You Must Own This Future Dominant Cannabis Company

Introduction

When I began reporting on the cannabis sector in 2019, every quarterly report was a huge event. Companies were so new that each report added a significant amount to the total financial information about the company. So, for example, after three public quarterly reports, the next one increased the total amount of information available by 33%. Thank goodness we are past those heady days when a report could contain clues about a company’s very survival, but reports are still exciting and important events.

In that vein, this article will review the Trulieve Cannabis Corp. (OTCQX:TCNNF) Q1 2022 report issued on May 12, and discuss how it portends Trulieve’s place in the cannabis universe. That will be preceded by discussion of a very powerful yet underappreciated theme in business that will be beneficial to Trulieve.

A Powerful Business Trend

Every new industry follows a pattern. It starts out highly fragmented, with scores or even hundreds of companies competing. Then, by a long process of attrition, acquisition, and organic growth, the industry consolidates to a few large, dominant names. How many dominant American soft drink or telephone companies are there? How about American car companies, home improvement, tobacco, or liquor companies? The answer is always a small number, as low as two. (The analysis here is for North America, cannabis’ primary market. Global growth is a later development.) We also find that these companies grew entirely in the same industry they started in. Coca-Cola’s (KO) first product, Pemberton’s French Wine Coca nerve tonic, Constellation Brands, was bulk wine, and Ford’s (F) was, well, Ford cars.

This is not to say that there aren’t other successful companies in these industries. Also, it doesn’t mean new companies won’t arise, and it doesn’t represent the endpoint of industry evolution. The fact remains, though, that investing in a future dominant company has been a road to wealth throughout history.

It’s a given that cannabis will follow the same path. Just a few years ago it was anyone’s guess which companies might grow to dominate. Some of the early candidates, such as Aurora Cannabis (ACB) and Tilray Brands (TLRY), already have fallen badly behind. Thanks to the speed with which modern society moves, however, we are quickly getting more clarity in the matter.

The table below shows the nine public cannabis companies that have a market cap of over $1 billion. Trulieve is 3rd in market cap, 2nd in revenue, and is projected to be 1st in earnings by 2023. The merger of Cresco with Columbia Care (OTCQX:CCHWF), scheduled to close at the end of 2022, may put them above Trulieve, but the market cap and revenue of the combined company is an open question.

Company (Symbol)	Market cap	Revenue 2022 est.	Revenue 2023 est.	EPS 2022 est.	EPS 2023 est.
	(billion $)	(million $)	(million $)	($)	($)
Curaleaf (OTCPK:CURLF)	3.97	1440	1840	-0.08	0.03
Green Thumb (OTCQX:GTBIF)	2.97	1050	1340	0.31	0.52
Trulieve (OTCQX:TCNNF)	2.71	1350	1600	0.21	0.74
Canopy Growth (CGC)	2.33	420	473	-0.07	-0.72
Verano (OTCQX:VRNOF)	2.25	973	1280	0.42	0.71
Tilray (TLRY)	2.21	631	718	-0.22	-0.21
Cronos (CRON)	1.17	113	160	-0.27	-0.22
TerrAscend (OTCQX:TRSSF)	1.15	351	549	-0.09	0.13
Cresco Labs (OTCQX:CRLBF)	1.12	941	1170	0.07	0.23

One might argue that Green Thumb and Verano are in an even better competitive position than Trulieve. They are certainly strong peers, and I have written positively about Verano and own both.

What Does The Q1 2022 Report Tell Us?

In 1Q 2022, Trulieve further strengthened its position within the industry. They had a record $318 in revenue (+64% YOY and +4% sequentially). Adjusted EBITDA was $105 million, a record of 17 consecutive quarters of profitability that the rest of the industry can only dream about. The very important metric of operating cash flow was $45 million, and they have $267 million in cash to fund growth, the latest $75 million raised at an industry leading 8%. They ended the quarter with 162 retail locations, 30% of which are outside of Florida, and project adding another 25-30 locations this year.

Management has noted that in an active growth phase results will be “lumpy.” Initiatives funded this year won’t pay off until next year. $34 million in costs related to the Harvest acquisition had a material adverse effect on financials. Without these costs, the operating cash flow was $79 million instead of $45 million. The GAAP net loss of $32 million would be a profit of $1.7 million. During the conference call, CEO Kim Rivers noted that while these costs would continue for the rest of 2022, they would get sequentially smaller. Backing out those costs gives a more accurate picture of company performance.

There’s Growth, And Then There’s Growth

Growing bigger is not synonymous with success. Curaleaf, number one in revenue and market cap, is the industry poster child for unrestrained growth. It has been around as long as Trulieve, but has never shown a profit (there is a projected profit of $.03 per share for 2023). They have funded growth largely with new shares, diluting shareholders by 76% over the last three years, so any profit is spread over 699 million shares. By contrast, Trulieve profits will be distributed to 147 million shares currently.

Curaleaf’s approach to growth may prove successful in the long run, but the process of becoming one of the dominant companies is reinforced by smart growth. Only time will tell which companies have it, but along the way they can be evaluated on necessary (if not sufficient) characteristics such as:

• positive cash flow

• profits

• meeting business objectives

• disciplined use of capital

• improvement on important performance measures such as gross margins, EBITDA, ROIC

• few or no setbacks from poor planning, forecasting, execution or other corporate activity

• effective crisis management

• increasing shareholder value as reflected in per share measures.

Through the first quarter of 2022, Trulieve has an exemplary record on all of these characteristics.

Strategic Priorities

Trulieve has four strategic priorities:

1. Deliver Exceptional Customer Experiences and Build Brand Loyalty
   • Provide superb service, expedient transactions, and frictionless returns
   • Innovate across product and consumer categories
2. Expand through Hub Strategy
   • Invest in cornerstone markets: Florida, Pennsylvania, and Arizona
   • Expand in new and existing markets
   • Pursue organic license awards and strategic M&A opportunities
3. Distribute Branded Products through Branded Retail and Wholesale Channels
   • Expand distribution of branded products through branded retail locations
   • Convert acquired, affiliated and/or operated retail locations to Trulieve brand
   • Develop and expand wholesale channels with initial emphasis on AZ, MA, MD, PA
4. Focus on Profitable Growth and Create Shareholder Value

Source: Trulieve Investor Presentation, April 2022

The latest earnings call transcript has numerous examples of how Trulieve is adhering to these priorities in a disciplined manner. This approach has led to the company’s success so far and will enable them to continue growth that is durable and profitable.

Trulieve Stock Price

Trulieve stock is down 62% in the last 12 months. With the other big cannabis names down 55-66%, it’s not a notably bad performance. Investors shouldn’t read too much into the decline because it’s distorted by a rise of 500% during the height of the high-growth bubble. That was an extreme and unsustainable market completely out of line with valuations.

The longer term chart shows a gain of 46.5% since going public, and a 48% gain since I first recommended them in April 2020. It’s important to recognize that while many downtrodden names in cannabis and other high growth sectors are still overpriced on the basis of high or negative price/earnings and other metrics, Trulieve is building off existing profits and positive cash flow. The projected price/earnings (P/E) ratio is 69.4 for 2022 and falls to 19.7 for 2023. We are still in the early innings of cannabis growth, with management planning for industry sales to double in five years. This will help the P/E to continue to come down in out years, making Trulieve a BUY today for investors with a timeline of several years or more.

Risks

There are risks with Trulieve, as with any company in a high-growth emerging industry. Projections of future performance are by their nature uncertain. Growth of the industry and Trulieve specifically could be lower than projected. Also, the industry is very dependent on favorable state and federal legislation for continued progress. The health aspects of cannabis also bring risks. In order to reach its full potential, the therapeutic potential of cannabis needs to be realized through research, but the outcomes of current research programs are unknown. In addition, any research establishing negative results on health would impair the entire industry.

Summing Up

Every industry follows a pattern from initial fragmentation to eventual consolidation to a few very large players. The fast pace of modern society has compressed the timeline so that, in cannabis, the potentially dominant companies are already starting to make themselves known. The evidence so far suggests Trulieve is one of them. The eventual winners will have advantages of scale, depth, experience, and clout that will enable them to sweep up an outsized portion of rewards from this dynamic growth industry. Investors can benefit from this process, although it’s still in its early stages and there will be many ups and downs along the way.

Growth is a crucial part of the formula, but not the only part. Some companies, notably Curaleaf and Cresco, are trying to shortcut their way to bigness through acquisitions. Acquisitions are an important factor, and Trulieve is certainly active in that area. In Trulieve’s case, the growth is well planned and executed, and is always in service to the primary mission of growing and improving the durable, profitable business that the company has created.

There are many strategies for cannabis investing, and many companies that have the potential to reward shareholders. A portfolio that has a long-term component will be well served by an allocation to companies that can become one of the dominant players when the industry reaches that phase. Trulieve is well-positioned to become one of those companies.