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Cannabis stocks surged in the last month with Green Thumb Industries Inc. (OTCQX:GTBIF) nearly doubling from the recent lows. Positive signs on the regulatory front and a share buyback have investors far more positive on the multi-state operator (“MSO”). My investment thesis is still ultra Bullish on the stock, even after the rally back above $11.
Improving Regulations
Every sign exists that the Federal government is finally going to make a move to reschedule cannabis to a Schedule 3 drug and/or approve the SAFE Banking Act. Either move would send the domestic cannabis stocks soaring beyond recent gains.
A few weeks back, the Department of Health and Human Services (HHS) recommenced the Drug Enforcement Agency (DEA) reschedule cannabis from a Schedule 1 drug narcotic similar to heroin to a Schedule 3 drug. The move would remove the 280E tax requirement with cannabis no longer illegal at the federal level, but a lot of questions exist on complete impacts of medical versus recreational cannabis, FDA requirements and the ability to up-list stocks to major stock exchanges.
Another issue is that some Senators have pushed back on the DEA removing marijuana from a dangerous Schedule 1 drug. Senator James Lankford (R-OK), along with 8 other Senators, sent a letter to the DEA claiming the science doesn’t support the move recommended by the FDA working with the HHS.
Source: Twitter/X
Per an interview with Benzinga, Trulieve Cannabis (OTCQX:TCNNF) CEO Kim Rivers called this a monumental move, helping the company save both on taxes and improves the perception of cannabis. Other cannabis CEOs called out a move to cannabis as very important step for the cannabis sector.
The SAFE Banking Act approval is another huge upside potential. The MSOs would, in theory, obtain access to the banking system to lower the cost of capital and provide access to uplist stocks to major U.S. stock exchanges.
Senate Banking Committee Chairman Sherrod Brown (D-OH) has pushed plans to hold a vote during the current work session that ends October 6. All of the news points towards a deal is close, though votes around cannabis always appear close and never get passed.
Stock Buyback
Back on September 5, Green Thumb management announced the company had approved a share repurchase plan for up to 10,486,951 shares. The buyback has a cap of only $50 million.
The stock has soared in the last week, leading to the buyback plan only allowing for up to 5 million shares. Green Thumb ended Q2 with a cash balance of just $149 million while outstanding debt is $290 million.
The MSO has generated substantial cash flows in the last few years outside of the 280E tax payments. Green Thumb produced the following large cash flows in 2020 through 2022.
Source: Green Thumb presentation 
Just this year, cash flows from operations were $93 million, net of $52 million of tax payments. The majority of these tax payments are related to 280E taxes.
Curaleaf (OTCPK:CURLF) Chairman Boris Jordan claims the company would save upwards of $170 million in 2024 from the elimination of the 280E tax requirement. Curaleaf sales are forecast to hit $1.44 billion in 2024 with some international sales, while Green Thumb is targeted for sales around $1.10 billion in an indication of the impact to each MSO.
Green Thumb has a market cap of $2.6 billion now with the stock up at $11 and 238 million shares outstanding. The stock trades at about 9x the adjusted EBITDA run rate just above $300 million now.
In theory, the stock is relatively cheap based on adjusted EBITDA and the ability to potentially soon eliminate the 280E tax payments, pushing operating cash flows much closer to EBITDA. The small net debt total of $140 million doesn’t alter the EV/EBITDA valuation very much.
Green Thumb really doesn’t have the cash balance now to spend money on repurchasing shares, even if only $50 million worth. The company is probably far better off conserving crucial cash than repurchasing what amounts to 2% of the outstanding shares. If the stock was to fall back to the recent lows around $6, a share buyback might make far more sense due to the ultra-low valuation.
Takeaway
The key investor takeaway is that Green Thumb remains a bargain, even after nearly doubling on promising regulatory news. The company has proposed a share buyback, but the MSO would probably be far better off conserving cash with the uncertainty surrounding federal regulations of cannabis.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
