Cannabis stocks, down for the past year, got a surprise jolt last week when talk of the SAFE Banking Act was revived in the U.S. as part of a bipartisan effort. The act has passed seven times in the House, but never in the Senate.
The Senate scheduled its first hearing for cannabis banking reform, thanks to efforts by Senators Jeff Merkley (D-Oregon) and Steve Daines (R-Montana).
One reason the act is important to U.S. cannabis companies is because they currently have to operate on an all-cash basis. This has become a security issue as dispensaries have been targeted for robberies. The act would also give cannabis companies more options for funding.
That doesn't mean the passage of the SAFE Banking Act will benefit all cannabis companies. Price compression, driven by a glut of cannabis, is still an industry problem, as are labor shortages. The companies that will benefit the most are large, multi-state operators with a proven track record of financial success. Banks lend money to get it back.
Two companies that fit that category the most are multi-state operators (MSOs) Trulieve Cannabis (TCNNF -3.25%) and Curaleaf Holdings (CURLF -2.91%). That's why their shares rose more than 9% in the five days since the news broke about the reintroduction of the SAFE Banking Act.
Trulieve is set up to succeed
Trulieve is the largest cannabis company in the U.S. by number of retail outlets, with 181 dispensaries across 11 states. Last week, it opened its first two medical marijuana dispensaries in Georgia with plans to open three more in the state this year.
Last year, Trulieve set a company record with revenue of slightly more than $1.2 billion, up 32%. It also had a net loss of $246 million for the year, compared to net income of $18 million in 2021. However, when you exclude non-recurring charges and other moves connected with streamlining their operations and the Harvest Health and Recreation acquisition, the adjusted net loss last year was only $30 million. That means that as the costs associated with the buyout of Harvest Health ebb, the company's profitability should improve. The company has had 20 consecutive profitable quarters of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
The biggest problem for Trulieve isn't revenue growth -- it's a lacking cash position. And with its stock price down, selling more stock to raise money isn't a good option. Since it is still losing money, it will soon need more capital. It closed the year with only $219 million in cash. It has options, but getting financing from banks would be preferable to other possibilities. Before its $2.1 billion purchase of Harvest in 2021, the company was profitable, so it has the type of track record that banks would be willing to work with.
The company leads in Florida with 125 medical-use dispensaries and would be in a great position to benefit if the effort to legalize recreational-use cannabis sales in that state succeeds. Trulieve has been one of the biggest financial supporters of the ballot initiative, spending $30.5 million on the Safe & Smart Florida petition, which needs a little more than 50,000 additional signatures this fall to reach the 2024 ballot.
The company also leads in Pennsylvania with 19 medical-use dispensaries. The state's governor, Joe Shapiro, included potential adult-use sales tax in his budget. Pennsylvania borders four states that have recently legalized adult-use sales -- Delaware, New Jersey, New York, and Maryland -- so the push to not lose out on recreational-use tax money will grow.
Curaleaf is set up to be a survivor
Curaleaf has 152 dispensaries in 19 states, focusing on heavily populated states such as Arizona, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania. The company has cut costs by discontinuing business in less profitable states such as California, Colorado, and Oregon. It also reduced payroll hours and cut other expenses.
Curaleaf is big enough that it can be seen as a target. It was in a fight with New Jersey's cannabis regulators over the company's labor practices. The regulators recently reversed a decision that would have limited where the company could sell its product. Initially, regulators had turned down the approval of some of the company's annual licenses, meaning Curaleaf would have had to shut down two of the three adult-use retail locations it has opened in the state. It has two other medical-use-only dispensaries in the state as well.
The company is the largest MSO in terms of revenue. It announced its fourth-quarter and full-year numbers on May 1. It reported $1.3 billion in revenue in 2022, up 12% year over year. In Q4, Curaleaf had $352.5 million in revenue, up 14% year over year and 3% sequentially.
Curaleaf posted a net loss of $370 million for the year, compared to a loss of $205.9 million in 2021. In Q4, it reported a net loss of $260.3 million, compared to a loss of $72.9 million in the same period last year and a loss of $51.5 million in the third quarter of 2022. A lot of the expenses that contributed to the quarterly loss were one-time expenses as Curaleaf added eight new dispensaries and completed the acquisition of Tryke Companies, an MSO that operates in Arizona, Nevada and Utah.
Like Trulieve, though, Curaleaf's cash position isn't great. It said, as of Dec. 31, that it had $163 million in cash. That's enough to last less than a full year without raising more money. If the SAFE Banking Act passes, both Curaleaf and Trulieve would make better loan applicants than most other cannabis companies because of their assets.
U.S. federal legalization of cannabis sales may be a long way off, but in the meantime, Trulieve and Curaleaf are two of the most likely survivors to finish that marathon (of course if both are able to halt cash burn).
