Analyst On Green Thumb Industries: Impacted By Competition, Still A Top-Pick MSO

The Analyst:

Pablo Zuanic, from Cantor Fitzgerald, kept an Overweight rating for Green Thumb Industries GTBIF (GTII.CN), and a price target at $41.

The Thesis:

In a recent analyst note, Zuanic covered GTI’s results for the fourth quarter of 2021 and its guidance for the first quarter of 2022, which he considered to “reflect the overall market slowdown.” The analyst estimates sequential growth at 1% in the fourth quarter of 2021 while “management is pointing to a mid-single-digit drop in sales for the first quarter of 2022.”

Zuanic explained that increased competition (especially in PA/NV/MA) impacted the company’s profit margins. Gross margins for the fourth quarter dropped 2.6 points sequentially compared to the third quarter of 2021, while EBITDA margins were 31.2%, 5.5 points below the levels of the first quarter of 2021.

“In that sense, we would argue the read-across for the rest of the MSO group, as the earnings season gets going, is somewhat bearish for the near term,” added Zuanic. “Regarding Green Thumb, we would focus on the coming start of recreational sales in NJ and later in CT/NY (a 2023 story, in our view), and, also, on the company’s ramp-up both in M&A and capex.”

In 2021, GTI closed $600 million in deals (MN, VA, RI, MA, MD) vs. $14 million in 2020, and net capex almost grew 3x (to $188 million from $60 million).

“We wrote recently that the top 20 MSOs accounted for 18% of legal MJ sales in 2019 and for 49% as of the fourth quarter of 2021. The current regulatory landscape clearly favors the larger players and more established players. Green Thumb remains a top pick among MSOs (even though it trades at 9.6x our 2023 EBITDA estimates vs. 6.6x for the MSO average),” Zuanic noted.

Highlights Of The Fourth Quarter

• Sales were up 4% sequentially to $244 million.
• The net wholesale business fell 4% sequentially to $70 million, as the company allocated more inventory to its own stores.
• The retail piece including M&A was up 8% sequentially to $173.5 million, with same-store sales down 1% (vs. +1% in the third quarter and +7% in the second quarter).
• Management noted price pressures in Pennsylvania and Nevada, which resulted in a 2.6 points sequential drop in gross margins to 52.8%
• EBITDA margins fell 3.5 points sequentially to 31.2%.
• Operating cash flow of $49 million in the fourth quarter was the highest for the year.
• There was a meaningful ramp during the second half of 2021 with an average net capex of $72 million vs. $22 million in the first six months of the year.

Outlook

“Management is pointing to a sequential drop in sales for the first quarter of mid-single digits, but while that may be the market context, we think deals and expansion may result in sequential growth,” Zuanic wrote, projecting sales of $247 million ($244 million in the fourth quarter) vs. the FactSet consensus of $241 million.

“We do not expect new capacity to come through in the first quarter of 2022. (...) We expect profit margins to remain mostly steady in the first quarter. For the rest of the year, we think the company should benefit starting in the third quarter, from meaningful expansion in three states: OH (it does not have flower capacity at present); MD; doubling capacity in NJ (Patterson),” Zuanic concluded.

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