Cash burn, reverse stock splits, and consistent losses are three things investors have come to expect from cannabis companies. And lately, there's also been a lack of growth. But there is one company in this industry that appears to be an exception. Green Thumb Industries (GTBIF 3.56%) is not only profitable, but is doing so well that it recently announced a surprise move: It will be buying back shares.
On Sept. 5, Green Thumb Industries said that its board had approved a $50 million share repurchase program to run over the next 12 months. "We believe instituting a share repurchase program is an appropriate tool for creating shareholder value without compromising our growth initiative," said Chief Executive Officer Ben Kovler.
It's important to note that Green Thumb technically doesn't have to buy back any shares, only that it's authorized to do so. But it's still an important development, as it signifies the board's confidence in the company's financials, which look strong.
Why Green Thumb Industries can afford to do this
Green Thumb Industries is a large multi-state operator (MSO), with 84 retail locations open across the U.S. (as of Aug. 8) in 15 key markets. Unlike many of its peers, it has been growing, and doing so while staying out of the red. In the second quarter, net sales rose 2% on a quarter-over-quarter basis to $252.4 million. The company's net income of $13.4 million was also a solid 5% of its top line.
What's arguably even more important in this industry is cash flow. And during the first six months of 2023, Green Thumb Industries generated $93 million in cash from its day-to-day operating activities. Compared to other MSOs, Green Thumb normally outperforms on the basis of cash flowin the most recent quarter.
Data source: YCharts.
Why a buyback is a good move for the cannabis company
Share buybacks can make a lot of sense for a business that is doing well because they can give its stock price some support. Last year, shares of Green Thumb fell by a whopping 61%, and other MSOs suffered similar declines. Recently, pot stocks have been rallying on news that the U.S. Department of Health and Human Services is recommending a rescheduling of cannabis from Schedule I to Schedule III. While that doesn't necessarily mean that federal legalization is coming anytime soon, it has people talking about reform, and that's often enough to give pot stocks a boost.
Valuations, however, remain much cheaper than they were a few years ago. Investors aren't paying even 3 times sales for some of the biggest and best MSOs in the country.
Data source: YCharts.
When a company's stock valuation has plummeted, share buybacks can be a good use of its money, particularly when there may not be other attractive options for deploying capital. And with Green Thumb's board authorizing as much as $50 million, it gives the company the flexibility to make those buybacks as it sees fit without locking it into a firm commitment. That's a better option than paying dividends because instituting a payout can create the expectation from investors that it will continue, which puts pressure on the company.
For a growth-oriented business such as Green Thumb, a buyback conveys to investors a sense of confidence on management's part that the business is on track and doing well.
Is Green Thumb Industries stock a good buy?
If you're looking for a cannabis stock to buy, Green Thumb Industries is one of the best ones to consider right now. Although it doesn't trade on a major exchange, it has access to the largest pot market in the world -- the U.S. That gives it a big advantage over Canada-based pot companies that are focused on growing in other parts of the world. And with strong earnings numbers and cash flow, it's already one of the safer stocks to own in the industry.
