Featured Cannabis Stock Pick for 2020: Green Thumb Industries
Large, vertically integrated Multi-State Operators (MSO) can be exciting cannabis stock investment opportunities given their potential trajectory. MSO cannabis companies like Green Thumb Industries own several market verticals in key legal states. Why is GTI one of our Featured Cannabis Stock Picks for 2020?
Green Thumb Industries, Inc. is an exciting Multi-state Operator (MSO) that engages in the manufacture and distribution of branded cannabis products. It operates through the Wholesale and Retail segments. The Wholesale segment includes cultivation, production, and sale of cannabis via retail stores. The Retail segment consists of trading cannabis to patients and consumers.
Why do we like Green Thumb Industries as a top cannabis stock for 2020?
Strong Focus: GTI is a multi-state US seed-to-sale cannabis grower, producer, and retailer. It has a wholesale business (its Consumer Package Division, selling its brands to third party dispensaries) and a retail business (selling its own and third-party brands through its own dispensaries). It operates or is building 13 manufacturing facilities—in Illinois, Pennsylvania, Maryland, Massachusetts, and Nevada.
It owns and operates 25 retail dispensaries under its own RISE, Essence and GTI brands. They are licensed for, and currently plan to own and operate, 88 dispensaries across at least 12 states, each producing on average $3.6 mil in revenue per year. They produce and sell flower, concentrates, edibles, and topicals. Though they currently wholesale much of their harvest and are expanding their cultivation, GTI has said they may not choose to be a large wholesale grower in the long term if price compression becomes an issue with that model. If that happens they will likely focus on creating brands and operating dispensaries.
Strong Operations: GTI operates 260,000 sf of cultivation and processing capacity, which is scalable up to 750,000 sf. They do not disclose what portion is grow space versus processing space. If 50-75% is cultivation space, we expect them to produce between 15,000-22,000 kgs/per year, scalable up to 40,000-60,000 kgs per year.
They grow 50 unique cannabis flower strains, geared to different consumer segments. They also process raw flower into oils, using several extraction and purification techniques (BHO, CO2, Ethanol). Their current production is 22,000+ Kg/Year with future production slated at 60,000 Kg/Year
Why do we Recommend Green Thumb Industries as a strong cannabis stock for 2020?
There are a lot of reasons to like GTI as an interested observer. They are vertically integrated, with a focus on building brands, and creating a unique and attractive retail experience that builds loyal visitors. This supports their bid to preserve strong margins in an industry that will likely eventually experience price compression and falling margins.
They are diversified, having both a strong wholesale and retail businesses, and addressing both medical and recreational clientele. This supports them if, for example, price compression makes the wholesale side of the business less profitable. In this scenario, they could focus more on the retail side, where they own dispensaries and will be able to control retail price and shelf space in their locations.
Thirdly, their revenue has shown steady growth over the past 4 years. This is surprisingly rare among cannabis companies and shows that they are good at executing their plans and avoiding delays and setbacks.
They currently operate 25 dispensaries and plan to have 40-50 operating in a few years, roughly doubling their number. They target roughly $3.6 mil in revenue from each store. This suggests they could generate close to $180 million in revenue from their retail side in a few years.
Currently, they grow at least 25,000 kgs year, which at $6 gram generates about $125 million. When expansions are done, they expect to have a future capacity of 50,000-60,000 kgs a year. We think that $400-430 million is a good estimate of where their future revenue could be in a few years.
They also have a strong cash position (over $65 million) and appear to have excellent access to capital. This suggests they should have the money they need to invest to make their growth plans come true.
All this is promising news. But does it make for a good investment? For many, this depends on how much money they will generate in the future, versus how much revenue is baked into their current stock price.
The GTI stock price was down in 2019, just like all cannabis stocks, but is up over 30% in the last month. The price to sales is down to 13 (from 20) but is still too high for our liking. Is it too late to buy?
No. In fact, we think this is a good company that is fairly priced today for revenue the company should achieve in the coming years.
In other words, it looks to us like a good long-term investment, not a stock that will win a race for the highest gains in the next year or two. Instead, one that will produce an even-handed long term increase for long-term investors.
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