It is once again time for me to revisit Trulieve (OTCPK:TCNNF), a company which I have followed since its inception. Unlike the majority of marijuana companies in Canada and the United States, Trulieve is prospering. It has managed to capitalize on its head start in Florida and dominate that state’s medical marijuana business. More importantly, Trulieve has managed to expand while still recording profits and positive operating free cash flow.

Florida Medical Marijuana Population

Florida now has 321,144 people with medical marijuana ID cards, up 68.5% since the end of February 2019 when there were 190,646 such people. Data indicate a consistent addition of about 2,500 Florida residents each week with medical marijuana ID cards. The fact that the number of physicians allowed to prescribe medical marijuana in Florida has remained around 2,600 for the past four months seems to coincide with a constant growth in ID cards.

The observed absolute growth in Florida medical marijuana consumers seems likely to persist for the foreseeable future given Florida’s population of 22 million and its 1 million seasonal residents. The latter are eligible to obtain medical marijuana ID cards by showing leases or utility bills.

Trulieve claims it has 261,608 patients in Florida, which equates to an astonishing 81.5% of all Florida residents with medical marijuana user ID cards. Trulieve also states that it serves 7,300 patients per day in its dispensaries, and that its patients typically visit a dispensary 2.6 times per month.

Amount of Marijuana Consumption

At the end of February 2020 Florida medical marijuana dispensaries were selling 92,471,004 milligrams of THC laden medical marijuana; 2,065,353 milligrams of CBD and 25,263.702 ounces of smokeable marijuana in flower form. Smokable marijuana was introduced in the summer of 2019 and the Florida Office of Medical Marijuana Use, OMMU, began reporting ounces of flower dispensed on July 19, 2020. On that date it reported 9,415.72 ounces had been sold at dispensaries during that week.

In the 7.5 months since ounces of flower dispensed was first reported, the weekly sales of flower has risen by 15,848 ounces or 168.3%. Meanwhile, sales of THC rose by 41.5%; and, sales of CBD actually remained the same.

Trulieve’s Market Share

The growth in flower sales, since being introduced, has sparked Trulieve’s dominance in Florida. It is one of the few companies that has been able to grow enough flower to meet sales, which is critical in a vertically integrated, seed-to-sale state. The availability of flower at Trulieve has clearly enabled it to capture market share from other competitors.

In the final week of February 2020 Trulieve sold 45,693,102 mgs. of THC equal to 49.4% of the state total. Trulieve’s CBD sales of 377,252 mgs. accounted for only 18.3% of Florida’s total and its flower sales of 13,814.72 represented an impressive 54.7% of all flower sold in Florida.

During Q3, 2020 Trulieve flower sold at an average price of $9.62 per gram. Since there are 28.3495 grams in an ounce, Trulieve sold flower during its most recently reported quarter for $273 per ounce.

Trulieve has been able to sell 50% or more of all THC and flower sold in Florida while having only 19.3% of the dispensaries. Florida now has 233 medical marijuana dispensaries and Trulieve has 45. The average sales volume at Trulieve’s dispensaries dwarfs that of its nearest competitors and the same holds true for its home delivery where it utilizes a fleet of 100 next-day delivery vehicles. Trulieve expects that 20% of its fiscal 2019 revenue will be via e-commerce.

Perhaps the most important metric in retail sales is measuring same store sales growth also known as organic growth. This metric is especially important when trying to gauge real sales growth versus growth through acquisition and new store openings.

During Q3, 2019 there were 15 Trulieve dispensaries that were also open during Q3, 2018 and sales at those 15 stores increased by 43%. The 26 stores that were opened in both Q3, 2019 and Q2, 2019 showed an 11% increase. These are extremely impressive indicators of organic growth.

Trulieve - Recent Sales

An examination of quantities of THC, CBD and flower dispensed strongly suggests that Trulieve had excellent sales revenue in the fourth quarter of 2019. According to the OMMU, Trulieve dispensed about 556 million mgs. of THC in Q4 versus 494 million in Q3, representing a 12.6% increase. Trulieve also sold 107,175 ounces of flower in Q4 versus 59,105 ounces in Q3, representing a whopping increase of 81.3%.

Trulieve’s flower sales alone in Q4, 2020 at $273 per ounce would provide revenue of $29.3 million. Since the company says flower sales amount to about 50% of revenue, then that would imply revenue of about $60 million.

Data for the first two months of 2020 show that sales of THC are down about 13%, but sales of flower are up about 32% versus Q4 of 2019. Flower sales are averaging about 11,000 ounces per week versus 8,333 ounces observed for Q4. The observed decline in THC sales is likely attributable to the negative publicity surrounding vaping.

Extrapolating observed flower sales for the first two months of this year indicates Trulieve will probably sell about 132,000 ounces of flower during Q1, 2020. Since flower sells for about $273 per ounce, flower revenue will approximate $36 million this quarter. With flower accounting for 50% of total revenue, Trulieve is likely to report total revenue of about $72 million for Q1, 2020, and that would be 61.8% above the $44.5 million in total revenue reported for Q1, 2019.

Trulieve Stock Price Outlook

Trulieve currently has a market capitalization of $1.02 billion. It has a price earnings ratio, PE, of 7x based on its trailing twelve-month earnings. If Trulieve earns as much in its Q4, 2020 as it did during Q3 then it will report earnings per share of $1.75 for fiscal 2019 on anticipated revenue of $220-$240 million. Trulieve’s current share price of $9.15 therefore equates to a PE of 5.2 based on this 2019 earnings forecast.

In its 2017 fiscal year Trulieve earned $0.05 per share. In fiscal 2018 it earned $0.42. Its EPS therefore rose by 740% in 2018. If it earns the $1.75 per share mentioned above for fiscal year 2019 then its year over year growth rate would be 316%.

Trulieve management expects revenue of $380-$400 million for fiscal year 2020. If they achieve that revenue and maintain their existing margin, earnings per share could reach $3.00. A 10x PE multiple would give TCNNF a price of $30 by the end of this year. Interestingly, fast food restaurant stocks like McDonalds (MCD) sell at 25x earnings, so 10x seems like a conservative PE multiple.

Security analysts frequently use PEG ratios to evaluate stocks. A PEG ratio is calculated by dividing the PE ratio by the growth rate of earnings. A PEG ratio below 1 is considered attractive. TCNNF has a PEG ratio of 0.023 using its current PE of 7.2 and its expected EPS growth rate of 316% and that PEG ratio makes TCHHF a screaming buy.

TCNNF is thinly traded on the OTC market. It trades an average of 280,000 shares a day. Accordingly, investors should only place limit orders to avoid unpleasant surprises.

If Trulieve manages to maintain its most recent operating results through Q1 of 2020 then it will report earnings per share of $2.00 for the 12 months ending March 31, 2020. It seems reasonable to expect Trulieve to trade at a 10x PE or $20 per share in the near future based on these expected earnings.

Technical Observations

The technical picture of Trulieve stock shows TCNNF trading below its 50, 100, 150 and 200 day moving averages, DMA. Its 50 DMA is $10.54, 100 DMA is $10.81, 150 DMA is $10.18 and its 200 DMA is $10.37.

TCNNF closed at $9.06 today, March 3, 2020, and the aforementioned moving averages indicate that the nearest resistance is at $10.18. Technical analysis indicates TCNNF could therefore rise by 12.4% ($1.12 divided by $9.06) before encountering resistance. Application of moving average analysis also indicates that TCNNF could rise rapidly once it breaks above resistance at $10.81 per share, since there is no resistance above that price.

Expansion Outside of Florida

Management’s foray into California, which CEO Rivers refers to as Trulieve's R&D dispensary, only cost a few million. It would have cost even less if Trulieve had hired a researcher at Florida State University to do an in-depth dive into the disastrous legalized marijuana market in California. The expected total revenue in 2019 of this dispensary in the desert is a paltry $1.2 million and is a needless distraction.

Going forward, Trulieve’s ill-timed entries into the Massachusetts and Connecticut marijuana markets will continue to drain Trulieve resources and be a drag on earnings. No revenue is expected from the Massachusetts assets in fiscal 2019.

The drag on Trulieve earnings because of the California, Massachusetts and Connecticut is affordable and pales compared to what might have been. As of September 30, 2019 Trulieve had only $24 million in Net Intangible Assets and $8.7 million in Goodwill cluttering its balance sheet. Of these amounts, Trulieve's May 2019 acquisition of the Connecticut dispensary for $19 million in cash accounted for $15.6 million of the intangible assets and all $8.7 million of the goodwill.

Intangible and goodwill assets on Trulieve's balance sheet amounted to only 13.8% of its shareholders' equity at the end of Q3, 2019. It also reported $31 million in cash on its balance sheet, which was down $23 million from the $54 million reported at the end of Q3, 2019.

The cash needed to fund the Connecticut acquisition and the construction programs in Massachusetts and Florida clearly led to the issuance of $60 million of 9.75% senior secured notes in June 2019 and a followed-on offering of an additional $70 million in October 2019. That debt issuance was augmented by the sale lease-back of Massachusetts and Quincy properties with Innovative Industrial Properties, Inc. (IIPR), a real estate investment trust focused on the marijuana industry. As a result of these external financings, Trulieve was able to report a November 15, 2019 cash position of about $100 million.

Final Comments

The analysis of Trulieve's financial statements presented in this article, along with the brief technical analysis of TCNNFs moving averages strongly suggest TCNNF is an excellent investment that is significant undervalued. TCNNF could easily double in the next year as investors realize Trulieve it is not the typical marijuana company.

Threats that once appeared imminent to Trulieve's unique Florida franchise have dissipated thanks to existing and prospective competitors running out of cash and the ability to raise capital. Most competitors are expected to lack cash and the ability to raise capital for the foreseeable future. Trulieve is therefore in the sweet spot allowing it to solidify and increase its dominant position in Florida.

Numerous other publicly traded marijuana companies that embraced the multi-state operator, MSO, model have proven it is fatally flawed concept. The fatal flaw is that MSOs operating in vertically integrated, seed to sale states, must continually raise an unlimited amount of cash. Once the cash becomes unavailable, these MSOs disintegrate while their licenses, grow facilities, processing plants and retail sites fetch only pennies on the dollar.

Trulieve directors and management need to look at these MSO corpses on the marijuana industry battlefield, say a prayer and count their blessings. They dodged bullets that continue to ricochet among companies in the marijuana industry that were hellbent on growth through acquisition.

Going forward, directors and management need to be on high alert to avoid getting sucked into financial sinkholes as competitors shed assets to raise cash needed to pay bills. Littering Trulieve's balance sheet with intangible assets and goodwill must be avoided. Successfully navigating financial sinkholes will insure that insiders and TCNNF stockholders will be richly rewarded.

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