With no immediate hope of federal decriminalization or even the SAFE Banking Act being passed, it may be awhile until the market looks favorably toward cannabis stocks. In the meantime, investors can still find deals at relatively low prices -- as long as the companies' finances are sound enough to last what is likely to be a long shakeout period for the top U.S. multi-state operators (MSOs).
Green Thumb Industries (GTBIF 2.46%), Curaleaf Holdings (CURLF 2.02%) and Cresco Labs (CRLBF 2.49%) are three of the largest MSOs in the U.S., but only two of them appear to be good investments right now.
The case for Green Thumb Industries
The company stands out among U.S. MSOs because it's the only one that is consistently profitable, with 10 consecutive quarters of positive net income. Green Thumb closed 2020 and 2021 in the black, and despite a difficult 2022, is on track to do the same this year. Net income through nine months was $63.2 million, or $0.27 in earnings per share (EPS), up a respective 20% and 12.5% year over year.
Yes, the stock wasn't immune from the marijuana market downturn, as its shares fell nearly 60% over the past 12 months. It's also worth noting that the company's net income has fallen for two consecutive quarters, though it also increased revenue in those quarters. Through nine months, the company reported revenue of $758 million, up 17%, year over year.
As of Dec. 1, Green Thumb had 77 dispensaries across 15 states, including three states opening to adult-use sales this year: New York, which opened on a limited basis on Dec. 29; Connecticut, which began allowing adult-use sales on Jan. 10; and Maryland, which may open as early as July 1. In the third quarter, Green Thumb credited its increased revenue to growth in sales in New Jersey, as that state opened to adult-use sales on April 21. It's not unreasonable to think that Green Thumb will benefit from the new adult-use states, as it did with New Jersey.
The company trades for roughly 26 times earnings, which for a company with Green Thumb's growth record is a reasonable valuation. The company could also stand to benefit big if the push to make Florida an adult-use state comes to fruition. As of Jan. 13, it had only seven dispensaries in the state, but it has started a deal with Circle K convenience stores to allow it to have its Rise dispensaries on property adjacent to Circle K stores. Green Thumb started with 10 such test markets this year. As of Jan. 13, Florida has received 148,418 signatures on a petition seeking to put adult-use sales on a ballot initiative and needs 700,000 more signatures to do so.
The case for Curaleaf
Curaleaf, whose shares have fallen more than 50% over the past year, tops all U.S. MSOs in revenue. In the third quarter, the company reported $339.7 million in revenue, up 1% sequentially and 7% year over year. It's one of the largest MSOs with 146 dispensaries in 21 states. On Tuesday, it became one of the first MSOs to sell adult-use cannabis in Connecticut, where it has four dispensaries. Like Green Thumb, it also has a presence in new adult-use states, New York and Maryland, with four dispensaries in each state.
Curaleaf also has a big presence in Europe, which insulates it a bit from the price compression and other issues facing cannabis companies in North America. The company sells 32% of the medical marijuana in Great Britain and can do distribution there as well as in Germany, Italy, Switzerland, and Portugal.
The company isn't profitable yet, though. Through nine months, it reported a net income loss of $98.8 million, or $0.14 in EPS loss, compared to a loss of $74.2 million, or an EPS loss of $0.11 in the same period a year ago. It did have nine-month revenue of $986.7 million, up 11% year over year, so over time it should become profitable.
Data by YCharts.
The case against Cresco Labs
Cresco Labs' shares are down more than 70% over the past year. The company just opened its 55th dispensary across the country, and is in 10 states. Cresco is about to get a lot larger -- its $2 billion purchase of Columbia Care, expected to conclude in the first quarter of 2023, will give it an additional 130 dispensaries, at least on paper. The company is having to divest itself of some of those dispensaries because of regulations in some states that limit how many dispensaries one cannabis company can hold.
The biggest concern I have about Cresco Labs is that, thanks to its purchase of Columbia Care, it has a higher debt-to-equity ratio than either Curaleaf or Green Thumb Industries. That level of debt could make it harder for the company to manage its expansion plans, and there are costs associated with the merger that will likely manifest themselves next year.
It's also concerning that Cresco's third-quarter revenue of $210 million represented a 3.5% drop sequentially and a 2% fall year over year. However, the company has been doing a better job of managing costs and lost only $3.2 million in the quarter, compared to $263.4 million in the same quarter a year ago. However, I fear that for the next year or two, the complications of combining the two companies and managing so many more dispensaries will hurt Cresco's bottom line.
