Look for Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII) to break away from the pack of US cannabis stocks, says Echelon Wealth analyst Matthew Pallotta, who in an October 2 note to clients elevated GTII to Echelon’s Top Pick in the cannabis industry.
Pallotta says that in contrast to a number of its MSO cannabis peers in the States, Green Thumb remains more than fully funded for its stated buildout plans, an especially important feature within the current climate, where a sustained selloff in cannabis issuers has turned the market sour for the raising of additional capital, leaving many cannabis operators struggling to find cash to finance their plans.
“We believe GTI’s fully funded balance sheet puts it in an incredibly advantageous position relative to its peers, where it can ride out equity and capital market weakness without diluting the capital structure and even possibly take advantage of distressed asset prices via tuck-in acquisitions,” writes Pallotta.
“In addition, we also point out that the Company has completed all announced M&A transactions and is not subject to risks regarding regulatory approval or questions surrounding the timing or closing of pending. As investors begin to give credit to GTI’s de-risked balance sheet and operations, we believe the stock price will perform accordingly and possibly de-couple from many of its peers in the cannabis sector,” he says.
Green Thumb, which has 13 manufacturing facilities and licenses for 95 retail locations and operations across 12 US markets, released its latest quarterly results on August 28, showing second quarter 2019 revenue of $44.7 million, a 228-per-cent increase year-over-year and 60-per-cent increase sequentially, and an adjusted EBITDA of $5.7 million.
“We are pleased to report another solid quarter of positive yet disciplined momentum with record revenue and positive adjusted operating EBITDA as our strategic plan delivers on operating efficiencies from scale. Continued execution of key priorities such as the closing of Integral Associates, accelerated store openings, and expanded distribution of our brand portfolio sets us up well for the future,” said GTI founder and CEO Ben Kovler in a press release.
The Q2 top and bottom line numbers beat analysts’ consensus estimates as well as Pallotta’s, who called the quarter “stellar,” arguing that although the company continues to execute on its plans and to meet or surpass expectations, the stock finds itself below the levels where it traded on the day before
Financially and operationally, the Company continues to execute on its plans, and meet or surpass expectations, constantly advancing and improving the fundamental state of the underlying business. However, today, the stock now finds itself below the levels where it traded on the day prior to releasing those second quarter results, a predicament that Pallotta blames on the industry-wide selloff, where US MSO’s have declined by an average of 55 per cent since late April of this year (GTII is down about 47 per cent over that period).
“GTI’s valuation is currently at depressed levels, which offer an opportunistic entry point for investors. The Company is trading at just 3.4x our forecasted 2020 sales, and 14.9x our forecasted 2020 EBITDA – which we expected to roughly double in 2021. Keep in mind, the Company has just turned EBITDA positive in Q219, and we expect GTI to sustain growth in profitability q/q as sales scale up, and the Company takes advantage of the operating leverage in its model,” Pallotta writes.
The analyst is maintaining his “Buy” rating and C$24.00 target price for GTII, which represented a projected 12-month return of 117 per cent at the time of publication.