Why is Trulieve (OTCQX:TCNNF) successful when other cannabis companies are not? How is Trulieve able to make a profit when other companies are drowning in red ink? Will their success continue? These questions will make an interesting case study in MBA classes ten years from now, but investors have more immediate and personal reasons for asking. Looking at how Trulieve works can might give us insight about how to direct our cannabis investments going forward.
Source: Trulieve. Trulieve Dispensary
Company history
A 2017 report in Cannabis Business Times reported the interesting story of Trulieve’s origins. It was founded by three veteran wholesale nurserymen in northwest Florida. This in itself made them different from other companies around the country, and they were able to leverage their longstanding relationships, deep knowledge of the state, and growing expertise to support their early efforts.
As the Cannabis Business Times article relates, Trulieve was in the first group of five Florida licensees, first to have cultivation facilities up and running, first to open a dispensary, first to serve a patient, and first to make a home delivery. Today they continue running ahead of the competition, having the highest sales, most dispensaries and most SKUs in the state.
Source: Trulieve. Dispensary offerings
Company performance
We begin by comparing Trulieve stock performance to the Alternative Harvest ETF (MJ) (used as a proxy for industry) since September 2019, before the Canada euphoria. Trulieve has easily outperformed the rest of the industry. The high in this chart was 13 and the low around 7, which is also mostly the range Trulieve has traded in since going public in October 2018
Source: Yahoo Finance
The last eight quarters saw steadily increasing revenue and income:
source: Q4 MD&A
Revenue and EBITDA are expected to continue growing strongly in 2020:
source: Investor Presentation Feb. 2020.
CEO Kim Rivers affirmed this guidance as recently as April 8, citing strong medical demand since the arrival of COVID-19. By any measure Trulieve has had an exemplary performance that is a sharp contrast to the rest of the industry.
Why has Trulieve been successful while most cannabis companies have not?
The answer begins with Trulieve’s three founders. As noted above they were nursery operators with 30 years of experience and volume of at least 40,000 plants per year. They had decades of success growing and selling agricultural products, decades of experience and knowledge that most companies in North America did not have. In other words, they knew how to grow plants and make a profit from them. Further, long established relationships with local officials meant that they were able to navigate the maze of regulations more easily, and they have publicly acknowledged the role of government officials in their success.
Florida is one of a few states requiring complete vertical integration, where you can only grow what you sell. With existing agricultural operations the owners could get to market quickly and efficiently. As first in the Florida to achieve numerous production and selling milestones (first dispensary, first sale, first home delivery, etc.), they built up a significant first mover advantage.
Trulieve is conservative regarding expansion within Florida. Their stated approach is to open a new dispensary only when they have enough product to supply it, and only expand cultivation capacity when they see sales big enough to absorb it. Consequently, they have never had to close an outlet or cut back on cultivation capacity.
Trulieve is conservative regarding expansion beyond Florida. They do business in only three other states, California, Massachusetts, and Connecticut, consisting of a total of three dispensaries and one cultivation facility. Until recently, Florida had a cap on the number of dispensaries a company could operate, and management rightly recognized that growth meant expansion elsewhere. Fortunately, though, they have avoided the curse of over-ambition that is the bane of the industry. Although expansion has put many companies in deep trouble, there is nothing inherently wrong with it if done carefully. Compare Trulieve’s 47 dispensaries and $252 million revenue in (barely) three states with Acreage’s 30 dispensaries and $70 million revenue in 17 states.
Trulieve management has the skills and experience to make the company succeed. The evidence is in the results. Success in this industry requires excellence in production, advertising, branding, selling, and finance. Trulieve has proven its ability by succeeding in all these areas.
Trulieve from the investing point of view
In my most recent Seeking Alpha article, Message From Cannabis, I identified four issues critical for the future of cannabis companies: taxes, regulation, capital and management. The tax issue in Florida is very good – no tax on medical cannabis. The regulatory environment was very strict to begin with, but there have been a series of reforms that continue to make it more sensible. As discussed above, Trulieve has excelled at managing capital and managing its business. Trulieve’s record of success and its high standing on these four issues puts it at the top in both safety and potential higher share price.
Given industry performance over the past two years and the current economic situation there’s no hurry to make an investment decision. It’s difficult to see circumstances that would turn around company or industry performance so fast that investors would miss it, and as I have said before on Seeking Alpha cannabis investment success is a matter of years, not months or days. On the subject of downside Trulieve stock has participated in industry ups and downs, falling after Canadian legalization, the capital dry-up in 2019, and COVID crisis. Unlike many others it has always rebounded, as investors recognize it is not in existential danger like so many others.
Trulieve reported on the impact of COVID-19 in their April 8 quarterly earnings call. Fortunately, they are in an industry deemed essential by most states. They report that sales have actually increased (flower by 62%!), which speaks to the tremendous attraction cannabis has for people. The company has made numerous adjustments to their supply chain, delivery and online capabilities to adapt to the new market dynamics.
As with any company, risks exist. The most visible is over-expansion that depletes the company’s resources. However, the company has been very deliberate in its expansion and says that it can be supported with funds from Florida operations that seem secure. A second issue is “super” shares held by company officers, board members and similar parties that constitute 67% of the share total. Conversion of those shares would mean significant dilution. However such financial and voting control is very common in the industry and almost a given of cannabis investing. Finally, there is always the potential for unknown surprises. In its short life the cannabis industry has already experienced at least three: the vaping controversy, the drying up of new capital, and COVID-19. I am reminded of a C-suite level friend who once remarked that the job of an executive is to deal with crisis, large and small, every day. Trulieve has shown it can navigate crises successfully and benefit from the fact that people consume more cannabis every day.
If you are a trader looking for a quick buck, I have no recommendation. I don’t know what Trulieve will sell for next week or month or quarter. If you are a longer term investor and want to initiate or add to a Trulieve position, now is an appropriate time. There are several positive developments on the horizon, such as recreational legalization in Florida and regulation development at the FDA. As the largest operator in Florida, these would have an outsized effect on Trulieve. Given the spectacular failure of experts to accurately predict cannabis stock performance it would be pointless to put a number on Trulieve’s future price. However, Trulieve has consistently met or exceeded all milestones to date and they are projecting strong growth. The future stock price will be higher, perhaps much higher, as economic conditions normalize and the industry grows into its huge potential.
Disclosure: I am/we are long TCNNF, MJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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