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After an Exceptional 2020, Can This Pot Stock Maintain Its Momentum?

By Sushree Mohanty - May 11, 2021 at 8:19AM

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2021 could be another rocking year for this Illinois-based cannabis company.

Marijuana sales skyrocketed in 2020. This pandemic-induced boom took the U.S. cannabis industry to great heights. Among the stocks affected was Illinois-based Green Thumb Industries (GTBIF 0.23%), whose exceptional performance last year makes it my top cannabis pick right now.

The company's actions last year showed how important it is for a company to strengthen its position in its home state. Illinois legalized recreational cannabis on Jan. 1, 2020, and saw record-breaking sales throughout the year -- total legal marijuana revenue hit the $1 billion mark, with $669 million of that coming from recreational pot. If one new legal cannabis market can bring in this much sales, imagine what the growth will be when federal legalization happens -- the possibility of which is rising.

Green Thumb rode this cannabis wave to success last year. Here's why it is not too late for investors to join in.

Marijuana buds, joints, bundle of American dollars and a marijuana leaf on a table.

Image source: Getty Images.

An exceptional year for Illinois and Green Thumb

Green Thumb offers its medical and recreational marijuana products under the Dogwalkers, Dr. Solomon's, and Rhythm brands, which are sold through its Rise and Essence store chains. The company's existing market share in Illinois allowed it to expand and take full advantage of the recreational market in its home state. Management said in its fourth-quarter (ended Dec. 31) earnings results that the bulk of its revenue growth came from the Illinois and Pennsylvania markets.

In Q4, revenue soared 134% year over year to $177.2 million, driven by all 12 of its U.S. state markets.  The company brought in the growth the "old-fashioned way," producing and selling more product in 2020, without the help of any mergers and acquisitions. Green Thumb operates through two segments -- consumer packaged goods and retail -- and both showed good progress in the quarter. 

Gear up for a green 2021

Green Thumb's management is excited about the Illinois market's progress. In the Q4 earnings call, CEO Ben Kovler stated that "Illinois is just starting." I agree with that. Just four months into 2021, the state has already generated close to $391 million in recreational sales. At this rate, it could easily break 2020 records and could generate more than $1 billion just from adult-use sales.

Green Thumb's competitive advantage in the state could lead to a drastic jump in revenue in 2021 if these estimates prove right. On March 3, the company partnered with California's No. 1 cannabis beverage brand, Cann, to manufacture and sell its cannabis-infused drinks in Illinois and then expand to other markets. It launched Cann to the Illinois market in April. It also plans to introduce this product soon in the New Jersey market, which recently legalized recreational cannabis.

Green Thumb's successful strategy in Illinois could serve it well in its other key markets, including Pennsylvania when that state legalizes recreational marijuana. Pennsylvania already allows medical cannabis and now is working on recreational cannabis reforms, but that could take a while. As of March 2021, Green Thumb operates the highest number of its stores in Illinois and Pennsylvania. It has a total of nine retail stores in Illinois and six in Pennsylvania, bringing its total to 56 dispensaries across the nation.

On May 3, Green Thumb entered into an agreement to acquire 100% of Dharma Pharmaceuticals, which allows it access to one of five vertical licenses (which includes one operating production facility and a retail location) in Virginia. Virginia passed legislation last month that will make recreational cannabis legal starting July 1. However, retail sales won't begin until Jan. 1, 2024. With this acquisition, Green Thumb now has a presence in a total of 13 states. 

Green Thumb's management also sees exciting opportunities in New York and Connecticut for recreational cannabis. New York, along with New Jersey, already made recreational cannabis legal this year, and Connecticut is following suit.

The marijuana boom isn't stopping anytime soon. In fact, 2020's impressive sales could even be surpassed this year with state legalization ramping up.

A financially sound company

The top-line increases helped Green Thumb report consistent positive EBITDA (earnings before interest, tax, depreciation, and amortization) in all four quarters last year. Positive EBITDA is a sign of a company's ability to tackle its operating expenses. Meanwhile, net profits calculate a company's earnings after all the deductions. Green Thumb managed to reduce its total SG&A (selling, general, and administrative) expenses, which came in at 30% of revenue versus 62% in Q4 2019. This cutting of expenses helped it gain a positive EBITDA of $61.3 million in Q4, compared to $7.8 million in the year-ago period. It also reported a net income of $22.5 million, or $0.11 per share, based on generally accepted accounting principles (GAAP).

It ended Q4 with cash and cash equivalents of $83.8 million and total debt of $99.1 million, out of which $342,000 is due within 12 months. We will know more about its current cash position when it reports its fiscal 2021 first-quarter results on May 12. Besides looking at the top- and bottom-line increases, in the upcoming earnings, investors should note whether the company has managed to reduce its long-term operating lease obligations, which stood at $146 million in Q4. Lease obligations are the amounts the company owes for rented production facilities and stores -- marijuana companies are generally prohibited under federal law from owning bigger production facilities and dispensaries, so they rent instead. Any challenge to the paying down of these obligations could take a toll on operations.

At the end of Q4, Green Thumb had 51 stores in 12 states.  Five of those stores were opened just this year, and the company holds an additional 97 retail licenses nationwide. Imagine the hold it could have on the U.S. cannabis industry if and when it's able to use them all. Looking at its expansion plans, wise growth strategies, sound balance sheet, growing revenue, and profits, there is little doubt that Green Thumb is set for another record year. Investors wanting to take advantage of this evolving pot stock should wait no further.

 

Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Green Thumb Industries. The Motley Fool has a disclosure policy.

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