Trulieve Should Be Sold

seekingalpha10-06

Trulieve has more than doubled in 2024 and is down the least among the largest MSOs since the end of 2021.The valuation is no longer cheap enough to cover the risks.I am downgrading it from Neutral to...

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Now, though, I am downgrading it from Neutral to Sell. Trulieve Core Markets Are Slowing or Shrinking  Trulieve is based in Florida, and most of its dispensaries are located there. The state just released data this week that shows that the year-over-year growth in medical patients has declined sharply. There are currently about 886K patients, which is about 4% of the state's population. The year-over-year growth was just 3.9% this past Thursday, according to OMMU, the state's Office of Medical Marijuana Use: Alan Brochstein, using OMMU data Trulieve operates 151 dispensaries, which is 22.1% of the 683 that are open in the state. Over the past year, it has increased its count by 18.9%, which is above the 15.6% growth in the number of dispensaries in Florida. BDSA, based upon POS data that it maintains, estimated September sales grew 5.2% in Florida. This is down a lot from a year ago and earlier, but it is faster than the patient count growth. The state releases unit volumes, and they have been well above the revenue growth. This past week, though, medical cannabis products with THC fell 1.1% from a year earlier, while smokeable flower products expanded by 10.7% from a year ago. Four weeks ago, the growth of medical cannabis products with THC had been 12.6% from a year earlier. With patient growth and store-count growth, the strong unit volume growth has been accompanied by falling prices. Things have gotten competitive. If adult-use doesn't pass, the Florida market is likely to be extremely challenging for Trulieve and its peers. The BDSA data for Arizona and for Pennsylvania, two \"hub\" states for Trulieve, suggest pressure. Arizona sales were reported at -19.8%, and Pennsylvania was estimated to have declined 6.3%. Trulieve does not break out its sales by state, but it operates 21 dispensaries in Arizona and 21 in Pennsylvania, which is a medical-only state.  In my article two weeks ago, I pointed out that the analysts expect sales to rise just 2% in 2025 to $1.22 billion, which doesn't sound exciting. This is about unchanged from the $1.218 billion the company reported in 2022. Of course, this will go up if Florida legalizes adult-use. Even worse, though, than the stagnant revenue has been the erosion in profitability. In 2022, the company reported adjusted EBITDA of $398 million, and the expectation, according to AlphaSense, is that the 2024 adjusted EBITDA will be $394 million, 1% lower than in 2022. Worse, the projection currently is that adjusted EBITDA will fall 5% in 2025 to $375 million. The Trulieve Valuation Is Not Cheap Enough Two weeks ago, the stock price was high, but the target I shared for year-end, $14.76, still suggested upside. At this point, though, the return from the now higher price of $12.15, 21.5%, is not enough to justify holding it. That target is based upon an enterprise value to adjusted EBITDA projected for 2025 of 8X. Perhaps 8X is too low, but then other companies will likely have larger upside too. Here is how TCNNF compares to its other large MSO peers: Alan Brochstein, using AlphaSense The Tier 1 MSOs trade more expensively than the rest of the MSOs, and Trulieve is middle-of-the-road compared to the other Tier 1 names. It trades a little above the average for 2025 projected adjusted EBITDA. Curaleaf (OTCPK:CURLF), which I continue to think looks expensive despite the big decline this year, is a Sell, and I recently moved Verano (OTCQX:VRNOF) to a Buy. Verano and Trulieve are similar in that they are big in Arizona, Florida and Pennsylvania, but Verano has exposure to New Jersey and Virginia. Investors have options beyond Trulieve for companies with exposure to Florida, and there are other MSOs that are cheaper too. The net debt of Trulieve is not as high as it would be if it included the tax liabilities that I highlighted in that last piece here. Deferred tax and uncertain tax position liabilities total $544 million. Trulieve Stock Could Decline Substantially Trulieve has been a rocket this year so far, up 133.2%. This stands out compared to its four Tier 1 MSO peers: YCharts The Global Cannabis Stock Index that New Cannabis Ventures maintains had increased just 6.0% this year, while the American Cannabis Operator Index has dropped 2.2%. To be fair, 2023 was rough for Trulieve, with the stock falling 31.2%, the most among the MSOs. Looking at the action since the end of 2021, it is down the least: YCharts I believe that many are excited about the potential for Florida to legalize cannabis for adult-use. If this doesn't happen, Trulieve faces a massive correction potentially. I also wonder if people have picked up on the expected decline in adjusted EBITDA next year. While what happens with Florida will have a huge impact on the price of TCNNF, a bigger factor is 280E taxation. This could be wiped out if rescheduling takes place (as the DEA is attempting to do). 280E sticking around will be bad for all American cannabis operators. Conclusion As I said in the piece two weeks ago, there are a lot of better ideas than Trulieve within MSOs and beyond for cannabis investors. With the recent rally of 9%, this is even more the case currently. Limited upside, especially relative to peers, is only part of the story here. Trulieve talks about its three core markets, but two of them are falling (Arizona and Pennsylvania). Of course, its largest market is Florida, and it continues to grow, but very slowly. Next month, its voters may approve adult-use in the state, and this could change things. I believe that analysts and investors are expecting too much, and it may fail to get the 60% of voters approving it that it needs. I liked Trulieve a lot in 2023, but I began disliking the stock earlier this year. I did upgrade it in June to Neutral from Sell when the stock was at $8.67. I kept it at Neutral two weeks ago, when the stock was at $11.04, but I am moving it back to sell after the recent move higher.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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