A Deep Dive into Trulieve (Part 1)

Disclaimer: While I am a shareholder of Trulieve, I am not publicizing my analysis as means for investment advice. I simply want to share my thoughts and encourage anyone to challenge me where I might be wrong. Feel free to message me on Twitter @PVofFCF if you have any questions.


Trulieve | Homepage

Summary

  • Trulieve is best-in-class with respect to market penetration, brand recognition, growth prospects, and profitability.
  • The company consistently beats quarterly Street estimates, suggesting the market is continuing to underestimate its future opportunities.
  • While a number of short-term headwinds are putting pressure on the industry, I believe Trulieve presents a unique opportunity over the next decade.

Overview

Trulieve Cannabis engages in the provision of medical cannabis products, primarily in Florida. The firm cultivates and produces its products in-house and distributes to its branded stores, as well as directly to patients via home delivery. Its products include smokable flower, inhalation, oral, sublingual, topical, inter-nasal, and concentrates.

Despite Trulieve operating legally its respective states, the federal status of cannabis restricts the firm from listing on major public exchanges, like the NYSE & Nasdaq. Instead, Trulieve is listed on the Canadian Securities Exchange (CSE) under TRUL and Over the Counter (OTC) under TCNNF.


Market Share in Florida

Every Friday evening, the Office of Medical Marijuana Use (OMMU) publishes the quantity of weekly medical marijuana dispensed for the prior Friday through Thursday.

As of the October 16th, 2020, publication, Trulieve was approved for 63 dispensaries, accounting for 22.2% of all medical dispensaries in the Florida market. In other words, there is 1 Trulieve dispensary for every 3.5 peer dispensaries. The closest competitor, Surterra Wellness (private), currently sits with 39 dispensaries, followed by Curaleaf (public) which sits with 33 dispensaries.

While the footprint within the market demonstrates a reasonable level of success, it does not necessarily reflect the quality of its business. However, looking at Trulieve’s portion of sales regarding THC+CBD and flower, it becomes obvious that it has a competitive advantage, allowing it to penetrate the market deeper than its competitors. Over the past year, Trulieve has accounted for roughly 50.0% of THC+CBD dispensed, as well as just over 50% of the flower sold.

Looking at the unit economics, on a per store basis, Trulieve’s individual locations sell an average of ~4.0x the THC+CBD and flower than its competitors.

Last, looking at the addressable market, Florida had 421K qualified patients at the end of September, averaging a 3% – 5% increase each month over the past year.

Scaled to account for the the portion of population that is eligible for medical use (21 years old), Florida currently sits with a 2.8% penetration rate. While the upside is unknown, looking at mature markets like Oklahoma, Maine, New Mexico, and Arizona, the potential penetration for Florida is likely more than 2x higher from here.


Google Trends

In terms of alternative data sources, I wanted to see what kind of interest Trulieve has in Florida, outside of the weekly OMMU reports. While I am not necessarily shocked, Trulieve dominates Google searches in Florida when compared to its top four competitors. Naturally, the public companies, (TRUL, CURA, and LHS) attract more attention than the private competitors, but Trulieve’s competitive advantage is seemingly getting stronger as its search history has increased 3x over the past year.

For additional context, below is a breakdown by metro, in which Trulieve dominates Google searches across the board.

Source: Google Trends

Remarkably, when you compare Trulieve’s Google search interest to major name brand retail stores, it is nearly as popular. Over the past quarter, Trulieve has become more popular than Chipotle and is on track to become as popular as Chick-fil-A, followed by McDonalds and Starbucks which are both within reach.

Source: Google Trends

Glassdoor Reviews

While Glassdoor reviews are not the be-all and end-all when evaluating the culture of a company, I do think it’s helpful on a high level to get a sense of sentiment from employees.

Looking at the individual ratings, I do not have any concrete takeaways. Given my experience with Kim Rivers, I would have expected her approval rating to be higher than 51%, but Trulieve also sits with just 61 reviews, so this will likely increase with time.

Will not specific to Trulieve, Cresco’s reviews are lowest of the “Big 4” in every category, outside of the CEO approval rating.

Trulieve currently has 720 job openings posted on Glassdoor, vs Curaleaf, Green Thumb, and Cresco which have 322, 347, and 159, respectively. This level of hiring speaks to magnitude which Trulieve is growing.


Fundamentals

Sales Growth

Foreshadowed by the aforementioned market share, Trulieve’s top line revenue has averaged 23% quarterly growth since the end of 2018. Consensus estimates predict the quarterly growth to continue, though at a slower 5% – 12% through the end of 2021.

However, I think it’s important to keep in mind that that sell side analysts have consistently under forecasted the quarterly results, and will likely continue to do so. That said, in Part 2, I will include my analysis which I expect to be a better predictor of quarterly results through 2021.

As with the OMMU data, I prefer looking at the unit economics of Trulieve’s revenue, and scale sales to their number of dispensaries. Over the next couple months, I suspect Trulieve will provide guidance on the number of new locations through 2021. For the time being, I am assuming that Trulieve will add 20 additional dispensaries, but recognize this estimate might be more than double than what Trulieve guides.

In any case, since the end of 2018, Trulieve’s average revenue per store has increased from $1.6M to $2.3M. Incorporating sell side estimates through 2021, this would imply that their average revenue per store settles at $2.2M, which again is likely too low.

As a recap from the Q2 results, Trulieve raked in $120.8M, growing at a rate that was generally in line with the seven largest public MSOs.

Profitability

Looking at profitability, Trulieve’s gross margin (before fair value adjustments) rose to 75% during Q2, but is expected to compress slightly, settling in the 70% range over the next year. While these expectations are reasonable, depending on the demand for edibles and THC products that warrant higher margins, we could see the gross margin remain closer to the 75% level.

Trulieve separates itself from the pack as most of the peers operate with gross margins lower than 50%. For what it’s worth, AYR Strategies also operates in a concentrated markets (Massachusetts and Nevada), allowing it to generate a similar profit profile.

EBITDA

I’m generally hesitant to use EBITDA as a proxy for earnings because a number of legitimate expenses can get overlooked. However, in the case of the MSOs, EBITDA makes for an easier comparison.

Over the past six quarters, Trulieve’s EBITDA has tripled from just under $20M at the end of Q1’19, to roughly $60M in Q2’20. Consensus estimates expect EBITDA margins to compress from 50% to 45%.

As with consensus estimates surrounding quarter sales, the sell side consistently underestimates quarterly EBITDA by roughly 30%.

As this relates to the public peer competitors, Trulieve’s adjusted EBITDA margin outpaces the average of 19%. To be fair, the peers will see significant growth in their EBITDA over the next 12-24 months, but Trulieve’s competitive advantage and market share in Florida sets itself far ahead of the pack.

Reflected in the aforementioned charts, Trulieve has averaged 30% of its revenue to operating expenses, including G&A, marketing, and depreciation.

Cash Flow

At the end of the day, a business is only worth the future cash that it can generate over the length of its life, discounted back to today. Like any business, the cash that it produces from simply operating is key in funding future growth. Trulieve is still in the first inning, but I want to highlight that because its profitable, it has been able to reinvest the a significant portion of its cash back in its business for further growth.

I think it’s also important to keep an eye on how Trulieve’s cash return on invested capital (CROIC) evolves over time. This rate can be thought of a proxy that the firm grows at over the long-term, given its ability to reinvest in itself.

Furthermore, the quality of Trulieve’s earnings have improved materially over the past year. Intention or not, during 2019, the company juiced accounting profits by way of elevated fair value adjustments, without actually generating any cash from operating. However, the past several quarters have been steps in the right direction.

(Lower Accruals = Higher Earnings Quality)

Valuation

Pulling everything together, Trulieve currently trades on par with the peer group when looking at it’s FY’20 and FY’21 EV/ Sales. However, as I noted in the section above, I am reasonably confident that these consensus estimates are underestimating Trulieve’s growth for 2021.

Looking at FY’20 and FY’21 EV/EBITDA comps, Trulieve trades at a substantial discount. I will elaborate in Part 2 why I believe Trulieve trades at a discount to the peer group (SSO vs MSO status). However, considering sell side estimates have expected 30% lower EBITDA each quarter over the last year, I would imagine, Trulieve will continue to beat expectations.


Warrants

Last, when thinking about the best approach to putting capital behind Trulieve, I wanted to touch on its warrants which were announced on October 19, 2019.

Each warrant will be exercisable until June 18, 2022 to purchase each share at an exercise price of C$17.25. With the warrants last trading at C$14.00 and a share price of C$17.25, the breakeven price amounts to C$31.25, or 9% above TRUL’s closing price on October 16, 2020.

The warrants can be purchased on the OTC market via TCNWF, but still settle in Canadian Depository for Securities (CDS), which will result in a $50-$75 foreign settlement fee for U.S. brokerages.


Conclusion

As indicated by twitter account, my goal is to invest in companies that I can hold for 10+ years, but ideally, these purchases will be held for 40+ years as I am only 25 and am a long ways away from retirement.

That said, Trulieve represents what I would consider a wonderful company with significant upside. While the industry has more headwinds than tailwinds in the short-term, I see Trulieve and the U.S. cannabis industry outpacing the broader markets for years to come.

As I look ahead, Part 2 to this deep dive will include my analysis on:

  • Why Trulieve trades at a steeper discount to the peer group
  • The risks surrounding Trulieve (FBI case, short report, political environment, hurricanes, etc.)
  • Trulieve’s insider, public institutional, and retail ownership
  • The Pennsylvania transactions and exposure to other states
  • Kim Rivers’ presence on twitter and engagement with the retail community
  • Florida supreme court decision on vertical integration
  • Bottlenecks in the Florida market