Green Thumb: Zuanic & Associates Explains Why This Cannabis Company Stands Out

Equity research firm Zuanic & Associates (Z&A) initiates coverage of Green Thumb GTBIF with an Overweight rating, highlighting its strong position in the MSO market.

Current Footprint and Growth Potential

Green Thumb is the second-largest MSO by EBITDA and third by sales, boasting a robust balance sheet and operating cash flow metrics. Operating in 15 states, with a focus on economically attractive regions, the company has consistently delivered profitability metrics and maintained a relatively unleveraged balance sheet. 

Pablo Zuanic, senior analyst, explained Green Thumb's (GTI) presence spans 15 states, with a particular emphasis on states transitioning from medical to recreational sales.

GTI is strategically positioned in states like CT, MD, NJ and RI where the recreational market is in its infancy.

Additionally, GTI is well-prepared for potential shifts in med states like OH, PA and FL toward recreational markets, depending on ballot initiatives and legislative changes.

"The company's current five medical states, with a total combined market sales of $3.8 billion in 2022, have the potential to represent a Total Addressable Market (TAM) of $12 billion if they transition to recreational use (assuming a $200 per capita spend), or even as much as $18 billion (at a $300 per capita spend; Michigan is at $330),” Zuanic wrote.

“Emerging recreational markets like CT, MD, NJ, NY, and RI could also make up a TAM of approximately $8 billion at a $200 per capita spend, compared to the $1.5 billion in sales in 2022,” Zuanic continued.

The analyst explained that while some states have store caps that may limit market share growth, few companies possess the resources to expand cultivation capacity and take advantage of the wholesale opportunities these states offer.

A Robust Portfolio Of Company-Owned Brands

According to Z&A, GTI has a diverse portfolio of company-owned brands, covering various product formats and markets.

The company's branded products have garnered significant market share in several states, including Illinois, Massachusetts, Maryland and Nevada. The emphasis on owned brands helps solidify its market presence.

“In the second quarter of 2023, net wholesale accounted for 25% of Green Thumb's total sales, a decrease from 33% in the first quarter of 2021,” Zuanic wrote.

“Notably, we calculate that sales of company-owned brands constituted 76% of the total sales at Green Thumb dispensaries. Green Thumb maintains a diverse portfolio of company-owned brands and does not license third-party brands.”

M&A Strategy And Organic Expansion

The company has actively expanded its store count, moving from 77 stores in April 2022 to 86 as of October 2023, and opening new locations across various states.

It has also increased capital expenditure to expand cultivation capacity in MN, NJ, NY, and VA, aligning with the expected timing of recreational sales in these states.

Valuation and Growth Potential

Zuanic explained the volatile nature of the cannabis industry, coupled with its sensitivity to federal reform news, makes specific price targets and valuation multiples somewhat uncertain.

Nevertheless, with the cannabis market poised for substantial growth domestically, Green Thumb is well-positioned to benefit.

Even in a scenario without federal reform, the company exhibits significant upside potential through its growth initiatives and closing the valuation gap with peers like Curaleaf CURLF and TerrAscend TSNDF.

Z&A’s Comparative Analysis: GTI & MSOs

• Green Thumb ranks third in sales among 20 MSOs, with gross margins outperforming the group average.
• The company demonstrates efficient recurring cash SGA compared to its peers.
• Its EBITDA margins exceed 30%, a reflection of its attractive diversified footprint.
• Green Thumb leads in the conversion of EBITDA to operating cash flow.
• The company generated positive operating cash flow in CY22 and maintained a high OCF/sales ratio.
• It is one of the few operators with a 3% or better ratio for OCF adjusted by 280E in CY22.
• Green Thumb, like most MSOs, is yet to generate positive free cash flow in CY22.
• The company has been increasing its capex, focusing on expansion programs in various states.
• As of 2Q23, Green Thumb's net financial debt is low, representing a favorable financial position.
• The reported net interest-to-sales ratio is among the lowest in the group for companies with net financial debt.
• While the company's broader debt definition includes gross leases, it remains manageable and comparable to peers.

"In the context of a $150 billion market, a company with a 20% retail share would generate $30 billion in sales. However, Green Thumb's sales were 'only' $1 billion in 2022. Considering this perspective, Green Thumb's current valuation at 6.4 times the estimated one-year forward EBITDA (as per FactSet's EV definition and consensus estimates) is quite attractive,” Zuanic noted.

“We also believe it offers alpha when compared to its peers. Therefore, even in a bearish scenario where federal reform news remains uncertain, and state-level developments drive the industry, Green Thumb is still poised for potential upside,” concluded the analyst.

Photo by Rupert Britton on Unsplash.