As Covid-19 began to clobber the U.S. in February, sales of medical marijuana jumpedat Trulieve Cannabis. The Florida-based chain sold 50% more smokable stuff in the month’s third week than in the same week of January. By March’s third week, new Covid cases in the state were soaring and Trulieve’s sales had jumped another 50%, to more than 21 thousand ounces in the week ended March 19. Medical-marijuana customers were loading up on a product they thought essential in a disaster.

“We are very accustomed to hurricanes here,” says Kim Rivers, chief executive officer of Trulieve (ticker: TRUL.Canada). “There was a rush of activity prior to any potential stay-in-place order.”

Cannabis operations in every state that allows them to operate are reporting a rush on dispensaries, which have been deemed “essential services” as states close other retail activities. Recreational sales are up, too. “Like alcohol, people cope with stress by using cannabis,” says Matt Hawkins, who runs $165 million in cannabis private-equity investments at Entourage Effect Capital.

The burst of pandemic panic complements a steady rise in U.S. cannabis sales that investors have largely overlooked amid the financial debacles of better-known Canadian names like Aurora Cannabis (ACB) and Canopy Growth (CGC). Aurora’s NYSE-listed stock sank 90% in the past year as the company blew billions of dollars on production for Canada’s nationally legal—but feeble—market. Meanwhile, marijuana’s illegality under U.S. federal law has consigned U.S. operators like Trulieve to the obscure Canadian Securities Exchange. So, Trulieve and U.S. rivals like Curaleaf Holdings (CURA.Canada) and Green Thumb Industries (GTII.Canada) trade at discounts to their unprofitable Canadian counterparts, even though U.S. operators are producing positive cash flow on sales that dwarf Canada’s. This backwards valuation makes these decently well-funded U.S. outfits look like bargains.

“Contrary to popular belief,” wrote Stifel/GMP analyst Rob Fagan in a recent note, 2019 was a great year for U.S. cannabis sales.

Legal sales of pot in Canada have plateaued at a $1.3 billion annual level, notes Green Thumb CEO Ben Kovler, while U.S. sales are going at a $13 billion annual run rate in the 33 states that allow them under their laws. He thinks the U.S. industry could ultimately exceed $50 billion. “Our products are in high demand,” Kovler says. “We’re not worried about whether people are going to be interested in cannabis.”

A year ago, a large field of competitors was racing to build U.S. pot empires and the U.S. operators’ Canada-listed stocks traded at valuations that were almost as extravagant as U.S.-listed Canadian favorites like Tilray (TLRY).

Back then, private placements in cannabis companies were better deals than the publicly traded stocks, says Jason Wild, whose JW Asset Management has over $700 million in health care and cannabis investments. Now, the public pot companies are generally cheaper. And compared to Canada’s bumblers, Wild finds the superiority of U.S. operators to be “a no-brainer.”

At the peak of cannabis-stock giddiness, Canopy bet $3.4 billion on the U.S. chain Acreage Holdings (ACRG.U.Canada)—a deal whose extravagance contributed to the ouster of Canopy founder Bruce Linton by his company’s controlling shareholder, Constellation Brands (STZ). Poor execution at Acreage has cut its shares from 22.50 Canadian dollars (or US$15.89) to C$2.08. Other ambitious contenders like MedMen Enterprises (MMEN.Canada) and Harvest Health & Recreation (HARV.Canada) have run up losses and called off mergers they’d arranged at the market’s peak.

Now, capital is hard to come by for all but the largest and sturdiest U.S. operators. Leading that pack is Curaleaf, with 54 dispensaries in 17 states—including a giant location on the New Jersey shore that is the East Coast’s biggest. Among all the operations it manages, sales hit an annualized level of $325 million in the December quarter, up 134% from the prior-year period. The company ran a net loss on the quarter, but excluding noncash and one-time charges, Curaleaf says its annualized cash flow represented $55 million in earnings before interest, taxes, depreciation, and amortization (Ebitda). It finished the year with $42 million in cash and has since secured another $300 million in a term loan. At a recent C$5.08, Curaleaf stock values the fast-growing business at $1.9 billion.

Curaleaf board chairman Boris Jordan said that the capital-deprived industry presents interesting acquisition opportunities for the company’s cash. He’s optimistic that voters in New Jersey and Arizona will approve ballot initiatives this fall to permit recreational cannabis. He’ll need to look beyond many of the states where he already operates, since Curaleaf has the maximum allowed licenses in Massachusetts, New York, New Jersey, Pennsylvania, and Florida.

For Chicago-based Green Thumb, December-quarter sales more than tripled year over year, to an annualized level of $300 million. Like its peers, Green Thumb had a net loss, but before noncash charges its adjusted-Ebidta reached $57 million annualized. Year-end cash was $47 million and the sale and leaseback of some facilities has since raised another $57 million. It has 41 stores open in eight states. Green Thumb’s stock price of C$7.92 values the business at $1.2 billion.

Green Thumb’s home state just started recreational sales this year and investor-relations chief Andy Grossman says Illinois demand was outstripping supply even before the pandemic stockpiling. “When we get in front of sophisticated investors and they see our same-store sales growing north of 50% year over year—their jaws drop to the floor,” he says.

Compared to other U.S. leaders, Trulieve has chosen to go deep, not wide. Of its 47 stores, 45 are in Florida, where it dominates the state with more than half of Florida’s sales. Its December-quarter results won’t be out until April 8, but analysts surveyed by FactSet expect that sales more than doubled year over year to $315 million annualized. Trulieve has always led the industry in profitability and analysts estimate that annualized Ebitda approached $130 million. At C$12.58 a share, Trulieve is valued at $1 billion.

Although Trulieve has footholds in California, Connecticut, and Massachusetts, CEO Rivers says that Florida’s continued growth has rewarded Trulieve’s commitment. “The opportunity in Florida continues to be robust—to say the least,” she says.

The powerful growth and better-than-40% cash-flow margins put up by Trulieve show the possibilities for American pot producers.

There are still a number of smaller operators jockeying for place behind America’s big three. Among them are Cresco Labs (CL.Canada), iAnthus Capital Holdings (IAN.Canada), and TerrAscend (TER.Canada)—and each gets a Buy rating from Stifel’s Fagan, along with the three leaders. In a March 18 note, Fagan said sales by these companies have met high expectations, even though valuation multiples have fallen 60% in the past six months.

Investor Jason Wild recently put his money where his mouth is by joining a $33.5 million infusion in TerrAscend, an operator with licenses in Pennsylvania, New Jersey and California. Wild is chairman of TerrAscend’s board. Canadian producer Canopy took warrants in the company last month and made a $57 million loan—perhaps as a hedge on Canopy’s deal with Acreage.

While Covid-19 accelerated demand for cannabis, the industry would probably suffer with the overall economy if the coronavirus produces a sustained downturn. Curaleaf’s Jordan worries about the effect of an economic shutdown on his medical-marijuana customers. “Honestly, many medical-marijuana users are not in the upper economic stratosphere,” he said. “They are using cannabis as a cheap form of pain medicine or for sleep maintenance.”

But so far in the pandemic, cannabis spending isn’t looking like it’s discretionary. Jordan proudly notes that U.S. operators are showing impressive results despite disadvantages that include exclusion from national banking and capital markets, punitive federal tax treatment, and the inability of institutional investors to buy their stock.

Curaleaf and its peers are hiring restaurant workers and drivers displaced by the crisis. The cannabis companies hope states will take notice of the industry’s job creation and tax revenue when initiatives for legalizing recreational sales come up in states beyond the 11 that now permit such sales.

“Our people have been on the front lines,” says Jordan. Among them is his daughter, who came down with Covid-19 in the course of running Curaleaf’s New York stores.

In the long run, things can only get better for the country and this industry.

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