Trulieve Cannabis (TCNNF 2.03%) is a low-cost marijuana producer among the top multi-state operators in the U.S. Its dominance is most pronounced in its home state, Florida, where it has more than 100 dispensaries. However, to cement its status as a leader in the sector, it'll need to do more in other parts of the country.
The company releases its fourth-quarter and year-end earnings at the end of the month. The report could offer some important insights into how the business is doing after its recent acquisition of cannabis producer Harvest Health & Recreation. In particular, there are two things investors will want to watch for when the company reports its numbers.
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The effect of the Harvest Health acquisition on adjusted EBITDA
The fourth quarter will be important for Trulieve because it will be the first one where it will include a full quarter's results from recently acquired pot producer Harvest Health & Recreation. The deal closed on Oct. 1, 2021, and the fourth-quarter numbers will cover the last three months of the year. In the press release announcing the closing of the acquisition, Trulieve said it created "the Largest and Most Profitable U.S. Cannabis Operator." But with any acquisition, there will be a period of transition and integration that can weigh down the acquirer's financials.
When Trulieve released its third-quarter numbers in November, the company boasted that its streak of profitable earnings had reached 15 consecutive quarters. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $98 million and was 43.7% of revenue, with the top line coming in at $224.1 million. Harvest Health also reported a positive adjusted EBITDA of $26.3 million for the period, on revenue of approximately $92 million.
With both companies profitable on an adjusted EBITDA basis, it's unlikely that Trulieve will break its current streak. But the company also noted in the earnings release that "our team closed the Harvest acquisition in under five months while simultaneously meeting expansion targets in several markets." Those expansion efforts and the acquisition will likely drag down the bottom line at least this coming quarter. Investors will want to watch the adjusted EBITDA percentage carefully (not just in this quarter, but over a longer stretch) to see whether or not the business can maintain the same level of profitability as its business grows beyond Florida.
When Trulieve announced its 100th dispensary opening in August 2021, 90% of them were located in Florida. As of the end of Q3, that percentage shrank to 70%, with the company reporting 108 dispensaries in its home state out of 155 in total across the country (the percentage change largely due to the Harvest Health acquisition).
Quarter-over-quarter sales growth
Another crucial area for investors to focus on will be the top line. Specifically, it's the quarter-over-quarter growth that will be of key importance. While marijuana stocks were flying high a year ago during the pandemic and still generating strong growth numbers, that has come to a grinding halt of late.
An easy example is Trulieve's rival Curaleaf Holdings (CURLF 2.02%), which recently reported its latest quarterly numbers. For the last three months of 2021, the company's revenue totaled $320 million and increased by just 0.9% from the $317.1 million it reported in the previous period. A year earlier, its sales of $230.3 million grew 26% on a quarter-over-quarter basis.
The key number for Trulieve investors to compare against will be $316 million. That's the figure that the company said included results from Harvest Health in Q3. How much growth it generates using that as a baseline can be an important measuring stick against its key rival. That along with any change in adjusted EBITDA can give investors an early indication of how the acquisition is going.
Should you buy Trulieve's stock before earnings?
In the past year, shares of Trulieve have fallen 65%, closely mirroring the 63% decline in the broader Horizons Marijuana Life Sciences ETF. Pot stocks have fallen out of favor with investors during the past year, likely because the optimism surrounding legalization has waned. However, that could also be a reason to invest, while the stock's valuation is low and other investors are overlooking the sector.
Shares of Trulieve are currently trading around 52-week lows, and if you're willing to wait for optimism to return to the sector (which remains full of growth opportunities in the long haul), it could prove to be a great investment.
