It’s fair to say that this market doesn’t really know what to do with Trulieve (CSE:TRUL). The largest medical cannabis operation in the state of Florida leads all of its peers in revenue, margin and – according to FH estimates – unit sales. TRUL made everyone else in our MSO comparison look like they were playing in the minors. They’re the only public cannabis company anywhere booking a bottom line profit, and they’re doing it consistently. It’s happening in the most mechanical, obvious ways; with a tightly-run, well-managed, efficient operation. The company takes full advantage of their license. They grow weed and sell it, keep costs low, and are efficient with their capital. This is the tightest cannabis operation we’ve ever come across, and it isn’t even close. So… why are they trading at one third the price-to-sales ratio of their peers?

The whole thing seems too good to be true. So Fundamental Hype – your favorite source for independent reporting on venture-stage equities – has gone over TRUL backwards and forwards.

Here’s what we found.

“Pay no attention to the number below the line…”

If markets run on psychology, then a cash-positive business the size of Trulieve has the potential to give this equities market an existential crisis. This whole cannabis boom is growth-finance on steroids, and it’s just the latest iteration. Nobody has even looked at a bottom line since the Bush administration. The move for aggressive stocks in a growth market – the theory goes – is to use capital financing to run at a loss and grab market share. Let the private equity firm that buys it at a $50 billion valuation in 5 years worry about the bottom line; the time is now to establish a toehold and grow it into an entrenched fort. With a moat!

Then along comes Trulieve earning – not selling, earning! – US$0.42/ share while leading their home market. It isn’t something that anyone wants to have to explain, so nobody tries and, so far, nobody has bothered to ask. As far as the sell-side institutions that underwrite these deals are concerned, it’s just as well. Things could get awkward if the conversation comes around to the broker’s bottom line, or his firm’s.

Because the securities business doesn’t swallow that venture growth nonsense. Not for themselves. They make their money underwriting deals and selling them to retail shareholders. US multi-state operators are the best thing that happened to them since the gold boom. They’re all upside and constantly need financing. There’s plenty of stock to sell to the Canadian retail crowd… but not from a company with the AUDACITY to run around making money! Where do these try-hards get off showing everyone else up, anyhow!?

Who do they think they are?

Businessmen. In the purest sense of the word. And, in a departure from MSO tradition, they’ve written a series of disclosure documents that are uncommonly readable.

TRUL’s MD&A starts off like most of them; with an explanation that they’re involved in a business that is still against federal law, and of the state-level framework that they operate within. The twist is: the company’s delineation of the legal and banking environments in the US cannabis industry is hyper-readable. It might be the most concise treatment anywhere. Most of them appear in italics and read like a warning label, but Trulieve’s just describes it in a matter-of-fact sort of way, setting the rules of engagement before kicking off a plain-language overview of the business with what might be the best opening line this side of Bob Dylan’s Hurricane:

“Trulieve is a successful cannabis company…”

–Trulieve Q1, 2019 MD&A

It doesn’t sound like a flex, but how many of their peers can objectively say the same thing? Trulieve’s success in Florida makes it a good bet that they’ll be able to make a decent go out of the Connecticut and Massachusetts markets into which they’ve planned expansions. They also maintain a single adult-use dispensary in Palm Springs, CA.

TRUL is the largest medical cannabis company in Florida by volume, where they operate 23 28 of the state’s 123 total dispensaries. Operating in a medical-only state may have saved TRUL the hassle of the adult market. Their marketing infrastructure is the type of thing one might expect from a pharmaceutical company. They reach out to doctors and make sure they aren’t afraid to write a cannabis script, making sure the docs have a familiarity with TRUL’s available SKUs along the way. Florida’s laws require vertical integration of its licensees, so TRUL built the business to that spec, taking full advantage of the cost savings that the model is designed to exploit.

They offer all the modern conveniences that consumers have come to expect (next-day delivery, help line, loyalty rewards program). TRUL mentions an extraction facility and a kitchen, ostensibly ready to be put into action when Florida allows the sale of edibles and extracts, and tips the estimated capacity of their cultivation facilities, but they never really lean into it or sell it as a high-growth division. We’re reading the plain description of something expected to stand on its own merits.

The company-wide operation grossed TRUL $44.4M in Q1 of ’19, and $102.8 in the year ending Dec. 2018, which they turned into $0.42/share in earnings on a fully-diluted basis.

In US dollar terms over the same periods, Aphria Inc. (TSX:APHA)(NYSE:APHA) posted revenue of $13.4M and $45.2M, Aurora Cannabis (TSX:ACB)(NYSE:ACB) sold $21.8M, and $110.7M, Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) sold $116.8M at year end December 2018, and will be publishing their Q1 number June 20th. All three lost money. TRUL was in the black for both periods; $42.9M and $14.7M.

The Trulieve cap table is as uncomplicated as the business story. This company is owned by a group of insiders and their backers. 68% of the outstanding total is set to be freed from its lockup on July 25th, 48% of that total (and 33% of the total shares) belonging to management and listed insiders who, by our estimation, have built an objectively successful business for the only reason anyone ever does: it’s in their interest.

The form of capitalism that this TRUL pro group practices is structured in the same vertical integration as Trulieve’s cannabis business. These insiders are the owners of $12.4M of the company’s $16.4M in total debt, and lease or rent to the company much of the real-estate upon which Trulieve operates. Those interests are all properly disclosed and presumably held with pride. It is in the best interest of the debt holders and landlords that their debtors and tenants do well. We weren’t surprised to learn that management and the board are not in line for any sort of stock-based compensation, and don’t hold any options; they own enough stock and infrastructure that milking the treasury is beneath them.

Why so cheap?

The only reason anyone ever lists shares publicly is because they want to sell them. That doesn’t mean they’re going to sell them right away, necessarily. They may be inclined to just test the market… but they didn’t list them to keep them. Today, Trulieve’s listing has valued it at $1.6 billion, about a third of its peer average on a price-to-sales basis, and it serves this pro-group right for making this thing so tight. There are effectively 11 million shares in the float, and it averaged around 275,000 shares a day in volume over the past 100 days. That’s about CAD $4.5M worth of paper a day. By contrast, Curaleaf (CSE:CURA) averages more than 900,000 shares a day in volume; about CAD$10.2 million worth of paper per day.

Remember the notional brokers from the first act who we had fuming at Trulieve for showing the competition up? Those guys LOVE Curaleaf. CURA is the frequent topic of industry research reports and figures high in the mix in any and all industry-led sector discussion, and that likely has a lot to do with CURA’s public listing having begun with a $520M raise, led by GMP Securities and syndicated through the usual suspects (Eight Capital, Canaccord Genuity, Coremark, Haywood).

Trulieve never features in those sell-side reports. They get covered on message boards and on blogs like this one; by insufferable geeks who think they’ve used their spreadsheet superpowers to discover a hidden gem, but are really just oblivious to the mechanics of the capital markets and its gatekeepers.

The Trulieve principles aren’t that obtuse (which is probably why they’re in business instead of business journalism), so they’ve recently made an offering to the gods of capital syndication. A $250M raise consisting of senior secured notes and warrants. It’s ostensibly for general working capital and debt repayment, but actually to get some distribution and give the sell side a reason to get to work. Three days after it was announced, The Globe and Mail reports that Haywood Securities has initiated coverage of TRUL, with a price target of $28.50.

The purists in the shareholder base hated the raise, selling TRUL off -7% since they filed the prospectus on tepid volume. It was essentially flat today (-$0.01 to $14.50) on the announcement that Canaccord would be handling the raise, and one gets the sense that its’ being done begrudgingly. The Canadian financial framework might not have been something this group expected they’d have to grease.

It’s never easy… but making money isn’t yet a federal crime

The very last page of TRUL’s MD&A addresses the fact that the FBI has gone through TRUL’s offices in execution of a subpoena of the records of Trulieve CEO Kim Rivers CEO Kim Rivers has complied with an FBI subpoena by producing documents related to an investigation that has to do with public-office corruption at something called the Community Redevelopment Agency in Tallahassee, FL. The company maintains that it’s done nothing wrong, and that Rivers is not a direct target of this investigation, which is consistent with the FBI subsequently arresting and the Department of Justice indicting one J.T. Burnette on May 9th. Burnette is the husband of TRUL CEO Kim Rivers and a well-known Tallahassee Real Estate developer, financier and restaurateur. The financials note that TRUL made lease payments of $8.7 million to “the spouse of a director,” in the year ending December 31, 2018, and purchased another $9.6M worth of property and equipment from a spouse of a director in the three months ending March 31st, but it doesn’t say which spouse or which director.

It isn’t clear what, if anything, this means for TRUL. The board is confident that Rivers and the company aren’t implicated. Burnette is charged with being a go-between for City commissioner and head of the Tallahassee Downtown Improvement Authority Scott Maddox and undercover FBI agents posing as developers and offering bribes. The Tallahassee Democrat has been all over the story, but TRUL isn’t a direct part of it just yet.

So far, not all that much is known about the charges. The Democrat is covering it with interactive red-dot-plots of anyone and everyone associated with it, in what looks like an attempt to gain a few tips and start the type of feedback loop that leads to the reporting that gets the whole story. Their profile of Burnette outlines a pattern of using public subsidies to keep the cost of undeveloped land low, then building it up and selling or operating it, but if taking advantage of public subsidies was a federal crime, they’d have to indict most of the S&P 500. The accusation is that he was active in the improper sale of government favors.

They’re doing a great job down there at the Democrat, and we’re going to monitor this closely.

Built-in protection, WAY more to gain.

We ought not lose touch with the fact that TRUL is subject to the same macro-factors as the rest of this sector. It’s a security with no exposure to US institutions and only limited exposure to US retail. Like its peers, TRUL stands to benefit from any change in banking and finance regulations that give US institutions an ability to buy it without catching a RICO indictment or whatever.
In that context, Trulieve has two distinct advantages over its peers:

First, as a cash-positive business, they are in a better position to wait out the bureaucracy.

Second, when the time comes, the US buy-side is going to know exactly what to do with Trulieve. Money making enterprises with expansion potential and a huge top line are catnip for half of the independent equities fund universe, and the whole of private equity. There’s a collective pool of money in the states larger than the whole Canadian economy managed by people who don’t need to read a GMP Securities report, because they know how to read a balance sheet.

Conclusion

We’re long Trulieve, and we like it to out-perform the sector. In our estimation, the poor price performance relative to its peers has mostly to do with a tiny float and a lack of available business for the financial institutions, whose endorsement are a necessary for a stock to become a household name. The FBI sniffing around the other half of the Florida power couple that put this thing together is worth keeping an eye on, but we aren’t going to make it a concern until it gets anywhere near the licenses.

CORRECTION: Post has been updated to reflect the fact that, at the time of the post, Trulieve operates 28 of Florida’s legal cannabis dispensaries, not 23. Thanks to Jim in the comments for keeping us honest.

FURTHER CORRECTION: This post has been updated to reflect the fact that the Trulieve MD&A does NOT state that the FBI attended the company’s offices in execution of a grand jury subpoena, only that Rivers complied with the subpoena by producing documents. Thanks to the reader who alerted us to the error.