20 Aug

Green Thumb: Lower Target Price, Higher Valuation Multiple

WRITTEN BY Rajiv Nanjapla

As of Monday, Green Thumb Industries (GTBIF) was trading at 11.60 Canadian dollars. The company has lost 24.8% of its share value since its first-quarter earnings on May 30.

Green Thumb’s lower stock price

In the first quarter, Green Thumb reported revenues of $27.9 million—34% growth sequentially. During the same period, the company’s net losses rose from $3.3 million to $9.7 million.

In the last few months, the cannabis sector witnessed several scandals. Recently, CannTrust Holdings received a non-compliance report from Health Canada for its greenhouse facility in Pelham, Ontario. Media reports said that CannTrust’s CEO and chairman knew about the violations. Last month, the FDA sent a warning letter to Curaleaf Holdings (CURLF) for selling “misbranded drugs.” The scandals might have dampened investors’ sentiments. As a result, Green Thumb’s stock price fell. The weak broader equity market, due to recession fears and the escalating trade war, caused the stock to fall.

Green Thumb: Lower Target Price, Higher Valuation Multiple

Green Thumb’s higher valuation multiple

Despite the decline in Green Thumb’s stock price, its valuation multiple has increased. As of Monday, the company was trading at a forward EV-to-sales multiple of 2.15x compared to 1.87x on May 30. Analysts lowered their EPS expectations for the next four quarters, which led to an increase in the company’s valuation multiple. However, the company traded below its average EV-to-sales multiple of 2.65x for the past seven months.

Green Thumb continues to trade at a discount compared to its peers’ median value. On the same day, the median valuation multiple for 12 companies mentioned in the chart’s footnote was 4.88x. In comparison, Canopy Growth (WEED), Aurora Cannabis (ACB), and Cronos Group (CRON) were trading at forward EV-to-sales multiples of 8.44x, 11.42x, and 15.07x, respectively.

Green Thumb: Lower Target Price, Higher Valuation Multiple

Analysts’ recommendations

Since Green Thumb reported its first-quarter earnings:

  • Cormark Securities raised its target price from 26 Canadian dollars to 27 Canadian dollars.
  • Compass Point initiated its coverage on the company with a “buy” rating and a target price of $18.

All of the 12 analysts that follow Green Thumb recommended a “buy.” On average, analysts have a 12-month target price of 26.38 Canadian dollars. As of Monday, the company was trading at a discount of 127.4% from analysts’ average target price.

Peer comparisons

Green Thumb is still trading in the positive territory this year. The company has fallen more than 25% since its first-quarter earnings. Green Thumb has returned 5.9% YTD. The company has underperformed the broader equity market. The S&P 500 Index has returned 16.6%.

Cronos Group reported impressive revenue growth in the second quarter. The company has returned 10.4% this year. Aurora Cannabis stock has risen 15.0%. Earlier in August, the company’s management provided better-than-expected fourth-quarter guidance. Aurora Cannabis raised its secured credit facility. The announcements might have contributed to the rise in the company’s stock price.

During the same period, Canopy Growth’s stock price fell 2.6%. In the latest quarter, the company missed analysts’ revenue estimates, which caused the stock price to fall.

Green Thumb is scheduled to report its second-quarter earnings on August 28. Stay tuned for the earnings preview.

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