Green Thumb gets target cut from Haywood

Haywood Capital Markets analyst Neal Gilmer has given a bit of leeway in his support of Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News CSE:GTII), as he maintained a “Buy” rating but reduced his target price from C$40/share to C$36/share for a projected return of 121 per cent in an update to clients on Thursday.

Chicago-based Green Thumb Industries is a United States cannabis company with retail and production assets as well as a portfolio of branded cannabis products including Beboe, Dogwalkers, Dr. Solomon’s, incredibles, Rythm and The Feel Collection. Green Thumb operates the RISE line of retail dispensaries with a total of 77 licenses along with 17 manufacturing facilities across 15 markets.

Gilmer’s update comes after Green Thumb reported first quarter financial results for the 2022 fiscal year, which Gilmer noted to be slightly ahead of expectations.

“The Q1 financial results demonstrate resilient revenue performance in-light of softness experienced across a number of markets,” Gilmer said. “While the EBITDA margin for the quarter was slightly below target, we believe investors should not strictly focus on an individual quarter.”

Green Thumb’s financial quarter was headlined by revenue of $242.6 million for a relatively flat quarter and a 25 per cent year-over-year increase, while beating the Haywood projection of $234.6 million and the consensus estimate of $237.1 million. (All figures in US dollars except where noted otherwise.)

Despite the revenue beat, the company fell a bit short in relation to its margins, with the 51 per cent gross margin coming in below the 53 per cent target set by Haywood Capital. Meanwhile, the company’s adjusted EBITDA came in at $67 million for a 12 per cent year-over-year decrease, which was below the $71.3 million Haywood Capital estimate and the consensus projection of $73.5 million. Consequently, the company’s adjusted EBITDA margin for the quarter came in at 27.6 per cent, slightly below the 31.2 per cent projection.

Meanwhile, Green Thumb generated $55 million in cash flow from operations to produce its ninth straight positive quarter on that front, finishing the quarter with $174.5 million in cash compared to $244.2 million in debt.

Green Thumb also acquired one new dispensary and opened two new stores for 76 stores generating sales in the quarter, along with a Minnesota dispensary subsequent to the end of the quarter, with the company now looking to position itself in markets like New York, New Jersey, Connecticut, Rhode Island, and Virginia to set up its next leg of growth over the next 12-36 months.

“We continue to have strong conviction in our core thesis and given the opportunity ahead, we will invest in markets where we know demand is coming,” said Ben Kovler, Green Thumb Founder and Chief Executive Officer in the company’s May 4 press release. “As I have said before, growth is not linear and there will be quarter-to-quarter fluctuations depending on when new markets open to adult-use sales as well as the timing of our infrastructure investments.”

“We believe that all our markets will eventually open to adult-use sales—we don’t know exactly when—but we do know that Americans are choosing cannabis for well-being and our trusted family of brands are well-positioned for the future,” Kovler added.

With the release of the quarterly results, Gilmer has made a few minor changes to his financial projections for Green Thumb, with 2022 revenue now targeted at $1.034 billion (previously $1.026 billion) for a potential year-over-year increase of 15.8 per cent, then maintaining his $1.24 billion outlook for 2023, resulting in a potential year-over-year jump of 20 per cent.

In terms of valuation, Gilmer forecasts a gentle decline in the company’s EV/Revenue multiple, dropping from the reported 3.6x in 2021 to a projected 3.1x in 2022, then to a projected 2.6x in 2023.

Meanwhile, Gilmer has slightly reduced his adjusted EBITDA projection for 2022 from $326.7 million and a 31.8 per cent margin to $302.7 million and a 29.3 per cent margin. Looking ahead to 2023, Gilmer slightly reduced his adjusted EBITDA projection from $404.7 million and a 32.6 per cent margin to $395.2 million and a 31.9 per cent margin.

From a valuation perspective, Gilmer projects the company’s EV/EBITDA multiple to stay relatively flat from 10.4x in 2021 to 10.5x in 2022, then dropping to a forecasted 8.1x in 2023.

Overall, Gilmer continues to recommend Green Thumb to investors.

“We continue to favour the U.S. cannabis market and GTI continues to demonstrate a leading position in the industry,” Gilmer said. “The Company has regularly reported strong financials with consistent strong revenue growth combined with impressive margins.”

Green Thumb Industries has seen its stock price fall by 37.7 per cent since the start of 2022, unable to sustain a 2022 high close of $27.75/share on February 15, having closed Thursday at a 2022 low of $15.40/share.