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Why Green Thumb Industries Is a Good Cannabis Bet

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Amid the global sell-off due to COVID-19, Green Thumb Industries (OTCMKTS:GTBIF) fell to a low of 5.05 Canadian dollars on March 16. Since then, the company has made a significant recovery by rising 168.5% from its March lows. The company’s stock price rose due to its impressive first-quarter performance and stronger broader equity markets. Green Thumb Industries reported its first-quarter earnings on May 14. The company beat analysts’ revenue expectations and reported an improvement in its EBITDA. Despite the recent surge, the company is still trading at a discount of 17.8% from its 52-week high of 16.50 Canadian dollars. So, should you buy the stock? First, let’s look at the company’s growth prospects.

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Green Thumb Industries’ growth prospects

For the quarter ended on March 31, Green Thumb Industries reported revenues of $102.6 million. The amount represents sequential growth of 35.4% from $75.8 million in the fourth quarter of 2019. The expanded production and distribution of its products, opening new stores, and increased customer traffic, especially in Illinois and Pennsylvania, drove the company’s revenue. Amid COVID-19, the company’s management focused on developing its omnichannel infrastructure, which includes e-commerce, delivery, and curbside pickup services. These initiatives helped the company report an SSSG of 75% with a store base of 14 units. The company’s retail sales grew 45% sequentially to form 74% of the total revenue, while the wholesale business contributed 26%. In the fourth quarter, retail sales contributed 69%, while the wholesale business contributed 31%.

For 2020, analysts expect Green Thumb Industries to report revenue of $459.4 million. The amount represents growth of 112.2% from $216.4 million in 2019. I think that expanding the production and manufacturing facilities, new store openings, and the development of innovative products could drive the company’s revenue. Currently, the company owns 13 manufacturing facilities and 45 stores. Meanwhile, Green Thumb Industries has a license to operate 96 stores. So, there’s significant scope to expand. Also, the company’s products are sold in over 700 retail stores across the US. Along with these initiatives, the company continues to develop innovative products to drive its sales.

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Green Thumb Industries’ EBITDA to rise

While most cannabis companies are trying to become profitable, Green Thumb Industries has reported a positive EBITDA for the past three quarters. In the first quarter, the company reported an adjusted EBITDA of $25.5 million, which represents an improvement from $14.4 million in the fourth quarter of 2019. For 2020, analysts expect Green Thumb Industries to report an adjusted EBITDA of $116.5 million, which represents growth of 203.8% YoY from $38.6 million in 2019. The company’s EBITDA will likely rise faster than its revenue. The improved gross margin and lower operating expenses as a percentage of total revenue could drive the company’s EBITDA margin.

Analysts also expect Green Thumb Industries to report net profits of $8.8 million in 2020. The amount is an improvement from a net loss of $62.0 million in 2019.

Valuation multiple

As of May 27, Green Thumb Industries’ enterprise value was $2.07 billion. So, the company’s EV stands at 4.5x analysts’ 2020 sales estimate of $459.4 million and at 3.0x analysts 2021 sales estimate of $689.8 million. These sales estimates represent growth of 112.2% YoY in 2020 and 50.2% YoY in 2021. Since Green Thumb has already reported a positive EBITDA, we can look at its EV-to-EBITDA multiple. The EV stands at 17.8x analysts’ 2020 EBITDA estimates of $116.5 million and at 10.0x analysts’ 2021 EBITDA estimates of $207.5 million. These valuation multiples look reasonably attractive.

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Analysts’ recommendations

Russell Stanley of Beacon Securities is bullish on Green Thumb Industries. In his client note on May 26, Stanley said, “The stock has very strong momentum that should carry it through the test of an important resistance zone,” as reported by Cantech Letter.

Robert Fagan of Stifel GMP is also bullish on the stock. As reported by Cantech Letter, he reiterated his “buy” rating for Green Thumb Industries on May 15. Fagan raised his target price from 32 Canadian dollars to 34 Candian dollars. Following an impressive first-quarter performance, Fagan raised his revenue and EBITDA estimates for this year and next year. Currently, he expects the company to reported revenue of $484 million and an EBITDA of $146 million this year. For 2021, he expects the company to report revenue of $730 million and an EBITDA of $261 million.

Overall, analysts are bullish on Green Thumb Industries. All of the 13 analysts that follow the stock have given a “buy” rating. As of May 27, analysts’ consensus target price was 22.40 Canadian dollars, which represents a rise of 65.2% from its current stock price.

YTD performance and My take on GTII

So far in 2020, Green Thumb Industries has returned 6.0%—one of the few cannabis companies with positive returns this year. The company has outperformed its peers and cannabis ETFs. Curaleaf Holdings (OTCMKTS:CURLF), MedMen Enterprises (OTCMKTS:MMNFF), and Cresco Labs (OTCMKTS:CRLBF) have returned 2.0%, -30.7%, and -21.3% YTD, respectively. On Wednesday, MedMen reported its results for the third quarter of fiscal 2020. Read Did MedMen’s Q3 Earnings Start a Path to Recovery? to learn more. Meanwhile, Cresco Labs will likely report its earnings today after the market closes. For analysts’ expectations, read Cresco Labs Announces Expansion in Ohio before Q1 Earnings.

Overall, I’m bullish on Green Thumb Industries. By the end of the first quarter, the company had $71.5 million in cash and cash equivalents. The total debt was $92.9 million. With the company already reporting a positive cash flow, its balance sheet looks strong. Meanwhile, Green Thumb Industries has a significant scope to expand its operations. The company has licenses to open 51 more stores. Also, Illinois’s cannabis sales will likely rise multifold, which could boost Green Thumb Industries’ sales. Along with sales growth, the company’s margins are also expanding, which is a great sign. I think that the stock could rise more. As a result, investors should accumulate the stock.

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