With two-thirds of Americans in favor of legalizing cannabis and a slew of states passing cannabis legalization bills since the November elections, federal action on cannabis de-regulation seems possible, though not assured, in the near future. While change may be afoot in Washington, U.S. multistate operators (MSOs) have been posting strong growth and increasing profitability, at least on an EBITDA basis.
Because of federal illegality, U.S. cannabis operators have to pay out excessive taxes and borrow at high rates, limiting their ability to make any real net profits. Yet if those excessive burdens were to go away, these companies could become very strong consumer discretionary stocks with a long runway for profitable growth.
After an early 2021 surge, many U.S. cannabis stocks have pulled back in a similar manner to high-growth but unprofitable technology stocks. But after the pullback, Wall Street analysts still see significant upside for U.S. cannabis operators, with several having average analyst price targets well above their current stock prices.
Green Thumb Industries: Implied upside of 63%
Green Thumb Industries (GTBIF -0.81%) is one of the larger U.S. MSOs, with 56 dispensaries spread out across 13 U.S. states. Just recently, the company bought its way into Virginia, a medical state where the legislature just voted to legalize cannabis on a recreational basis, which will likely go into effect in 2024.
Currently in its medical form, Virginia has divided the whole state into five exclusive zones, with each licensee given a monopoly over a certain health area. Green Thumb just purchased Dharma Pharmaceuticals LLC, the licensee in the southwestern part of the state. It's an interesting geography, since that part of Virginia is very close to North Carolina, Tennessee, and Kentucky – three of the mere thirteen U.S. states where cannabis is still illegal in any form. With a head start in that region, Green Thumb could do very well should customers from those three neighboring states travel to Virginia to buy legal cannabis.
Green Thumb has spread itself a bit thinner than its peers, and therefore garners lower margins than the leaders, but those margins are improving fast as each state scales up. Last quarter, revenue surged 89.5% year-over-year, and adjusted EBITDA margins nearly doubled from 19.7% in the first quarter of 2020 to 34.7% last quarter.
Led by Ben Kovler, heir to the Jim Beam fortune, Green Thumb has been one of the more aggressive companies in spreading its brands throughout the U.S. as quickly as possible. Last quarter, the company partnered with Cann, a leader in cannabis-infused beverages. Green Thumb plans to roll the Cann beverages out in its home base state of Illinois and then throughout its national footprint.
Apparently, analysts are on board with Green Thumb's aggressive posture. The average price target among 14 analysts is $46.59, implying about 63% upside.
Cresco Labs: Implied upside of 80%
Another MSO spreading its brands far and wide across the U.S. is Cresco Labs (CRLBF -1.64%), which has retail dispensaries in seven states -- Illinois, Pennsylvania, Ohio, New York, Florida, Arizona, and Massachusetts, along with wholesale-only operations in California and Michigan.
Cresco has distinguished itself by really leaning into wide wholesale distribution of its brands, even if its brands are not sold in its own highly productive dispensaries. Compared with peers, Cresco has the highest proportion of its sales coming form the wholesale channel, which accounts for over half its sales.
While limited license states allow for high retail profitability today, Cresco appears to be preparing for a day in which state-level regulations fade away, and brands will have to compete more fiercely. When that happens, Cresco believes the industry will look a lot like the alcohol or consumer packaged goods industries, where brand power and breadth of distribution distinguish winners from the losers.
Through this strategy, Cresco has achieved number one market share in the highly attractive states of Illinois and Pennsylvania, where Cresco's products are in 100% of retail stores. The company also recently completed two consequential acquisitions in the key states of Florida and Massachusetts, where it hopes to reproduce the playbook from its successful Illinois and Pennsylvania operations.
After laying the foundation for growth last year, Cresco's sales boomed 168% year-over-year in the first quarter, while adjusted EBITDA essentially went from breakeven to 19.6%. Management expects to reach 30% EBITDA margins by year-end.
Analysts appear to like the outlook, with the average price target among 13 analysts at $18.49, about 80% higher than today's price.
Jushi Holdings: Implied upside of 94%
Good times also appear to be ahead for Jushi Holdings (JUSHF 3.03%), a smaller U.S. MSO than either Green Thumb or Cresco, but one that's growing fast. Founded by value investors who put $47 million of their own capital into the company, Jushi has selectively targeted dispensaries in locations with limited licenses that should lead to high returns.
The company's core market is in Pennsylvania, where Jushi has 13 dispensaries and plans for five more openings this year. Jushi also has a presence in Illinois, with two dispensaries in the college town of Bloomington, as well as Sauget, a suburb of St. Louis, MO.
Like Green Thumb, Jushi also bought into the Virginia market, with the sole license in Northern Virginia, the bustling suburb of Washington D.C. Jushi also recently added assets in Massachusetts, with the purchase of Nature's Remedy, the owner of two high-traffic dispensaries near major highways, a large grow facility, and land for cultivation expansion.
In addition, Jushi has cultivation facilities in Ohio and Nevada, and four carefully chosen California dispensaries in Santa Barbara, Culver City, Grover Beach, and Palm Springs. With limited competition in these localities, Jushi believes it can outperform in the most competitive cannabis market in the country.
Jushi is smaller than the other companies mentioned above, but it's catching up. Last quarter, revenue surged 29% sequentially, with first quarter revenue already exceeding half of Jushi's full-year 2020 revenues. Jushi could also make a good take-out candidate, given the heightened pace of consolidation in the industry this year. Analysts see more good things ahead, with an average price target of $10.34 among the seven analysts that cover the stock, about 94% above the current stock price.
Trulieve Cannabis: Implied 99% upside
As Jushi could become an acquisition target, Florida-centered operator Trulieve Cannabis (TCNNF 1.17%) is the opposite: a large consolidator in the space. Yet analysts still see similar upside for the stock, with the average of 14 analyst price targets at $71.41, nearly double the current share price. Trulieve recently agreed to acquire Harvest Health and Recreation (HRVSF) for about $2.1 billion in stock, the largest acquisition yet in the industry.
Instead of branching out aggressively like Green Thumb and Cresco, prior to the Harvest acquisition, Trulieve mostly built up a dominant position within Florida, where it has almost 50% market share in this highly profitable state. Trulieve had also acquired smaller toe-holds in Pennsylvania, Connecticut, one dispensary in California, and recently ramped its first production in Massachusetts. Most recently, Trulieve acquired licenses in West Virginia, where it looks to be an early mover in that medical-only state.
However, the Harvest acquisition will transform the company from a six-state operator to an 11-state operator. Harvest will bring a leading position in Arizona, a state which just voted to legalize cannabis on a recreational basis, along with neighboring western states including Utah, Colorado, and Nevada, while adding to the combined company's California footprint. Harvest will also increase Trulieve's scale in the core markets of Florida, Pennsylvania, and Massachusetts, along with the addition of Maryland.
It's a big move, and not a cheap one at $2.1 billion. However, Trulieve's management has a history of solid capital allocation and high profitability, and Harvest appeared to be coming into its own in its recent earnings report, with surging profitability in its own right. The company's complementary states also afford Trulieve the ability to build out an efficient "regional hub" strategy in the Northeast and Southwest in addition to Florida. If and when interstate commerce is allowed, leading positions in these adjacent states could lead to significant cost synergies.
Ayr Wellness: Implied upside of 127%
Finally, the cheapest MSO in analysts' eyes is Ayr Wellness (AYRW.F -5.22%). At a $1.9 billion market cap on a fully converted basis, Ayr is the second-smallest MSO on this list except for Jushi. But Ayr is quickly growing, from a two-state operator in 2020 to a seven-state operator by the end of this year. Just in the past few months, Ayr has already acquired cannabis companies in Florida, Arizona, Pennsylvania, and Ohio, to complement its 2020 footprint in Nevada and Massachusetts. The company is also set to close on an acquisition in New Jersey in July.
Ayr looks primed for a highly profitable 2021, with the return of tourism to its Las Vegas locations, as well as the ramping of Liberty Health in Florida. Ayr was able to buy Liberty on the cheap, for just $290 million, as Liberty was having problems cultivating strong yields in Florida's humid climate. However, according to management, Ayr's experts have already greatly improved operations, and has increased inventory on Liberty's shelves from two days a week to five days a week, on the way to a full seven-day supply by the end of this year.
Ayr's management believes its Florida assets, when brought fully up to speed, could one day be worth as much as the entire company. No wonder analysts, looking forward to a much-transformed Ayr by 2022, are so bullish, with an average price target of $60.08, 127% higher than today's share price.
But one caveat before you dive in
While Wall Street analysts are highly bullish on these stocks, investors should be aware that these targets likely factor in some rollback of federal prohibition, particularly section 280e of the IRS code. Without the rollback of that key provision, the value for these U.S. cannabis stocks would likely be reset lower. So while there is a good chance some form of regulatory rollback occurs, investors should factor in the the risk of the status quo remaining when investing in this high-risk, high-upside sector.