SCS: What's Happening on November 15, 2021
Trulieve's earnings were mediocre, but I still love the stock in the medium term. Jay Lutz wonders what is going on over at Skylight Health.
This morning before the bell Trulieve (CSE: TRUL) put out earnings. I thought they were mediocre.
Without considering the Harvest acquisition, the third quarter included 64% year-over-year revenue growth. The company also reported Adjusted EBITDA of $98M, while quarterly operating cash flow only worked out to around $26M and averaged around $25M/quarter over the last three quarters. And free cash flow was negative to the tune of over $125M for the first nine months.
One would assume the cash flow numbers are less impressive after we tack on the Harvest acquisition. However, the company boasts about an additional $26.3M last quarter in Adjusted EBITDA from the merger and has a much larger footprint for narrative purposes.
Of course, we don’t expect a company rolling out operations in various states to produce positive free cash flow when they are growing so rapidly. Perhaps causing the stock to close red today was the 4% quarter-over-quarter top-line growth. This works out to around 17% per annum which shows a significant slowdown to the organic growth profile of the company. And when you’re paying 40x operating cash flow to hold a CSE stock, you may have concerns the company could lose its darling status amongst retail shareholders. I don’t think that’s likely.
Well on Fast Money, CEO Kim Rivers told us that she thought the stock was down due to a sell the news event from Republican Congresswoman Nancy Mace announcing the States Act Reform Act at 2PM. See below:
Rivers boasted about how the company beat on both revenues and surprised on gross margins. She presumably was focused on the pre-acquisition gross margin number of 68.7%, as the company did not present a consolidated gross margin figure in their materials. Tim Seymor applauded her for having top-line revenue in line with CuraLeaf (CSE: CURA). Congratulations Kim, now go buy something in Europe or South America with your personal money and vend it into Trulieve at a higher price, because that’s how cannabis stocks work.
In my view, the major concern for Trulieve is how they face more competition in the key state they dominate. As newish licensees come online with little-to-no-moat in their way, it makes margin compression all but a certainty. It’s doubtful Trulieve will be able to repeat similar success in other states because, quite frankly, no one has ever accomplished what they did in that state. Political issues aside, which I will leave readers to Google for themselves, Trulieve set a bar so high that it will be impossible for them to maintain their margins and growth profile absent some sort of miracle M&A strategy.
Let’s be clear, although Trulieve may lose its fundamental strength as father time catches them, they will remain a best-in-class operator as we probably see a flood of capital enter the US Cannabis names. Three years ago most investors and bankers I spoke with all said Canopy, Aurora, Tilray and Aphria were garbage as we watched their stock prices expand 50-100x over a few years.
Sentiment is everything in today’s stock market. And retail investors love cannabis. Even if the numbers don’t add up.
Trulieve has accomplished more than any Canadian name could have ever dreamed of, yet in terms of Market Cap, hasn’t soared to their heights.
I’ve always made it clear, I love US cannabis stocks in the medium term. If Canada taught us anything, best-in-class operators are a great strategy; they attract the deepest pocketed investors and the most media attention. If you’re playing for legalization or descheduling and using Canada as a template, names like Trulieve and Green Thumb will be the gold standard.
But be careful hanging out at the party 4 years after they list on major exchanges. Canada raised billions of dollars and no one makes money. Those Facebook groups that once had 20,000 plus active Canadian cannabis investors are now a lonely place.
It’s still the early innings of the great US cannabis trade, but there is no shame in trying to beat traffic by leaving in the 7th inning.
Macro: The Macro Themes Surrounding Equities
Pierre Poliverre is really upset that Canada keeps printing money (Twitter)
Inflation Surge Pushes Gold to Five-Month High (WSJ)
Morgan Stanley says avoid U.S. stocks and bonds in 2022, sees S&P falling to 4,400 (SA)
China accuses the EU of threatening global trade (FT)
SEC rejects VanEck’s bitcoin-backed ETF (CNBC)
Michael Burry Takes Aim at Tesla, Rivian in Latest Twitter Rant (TDD)
Large-Cap News We Can’t Ignore
Johnson & Johnson announced plans to create two new companies by splitting its consumer products business and pharmaceutical / medical device operations (CNBC)
Trulieve Posts $224.1 Million In Q3 Revenues, Positive Net Income (TDD)
Small Cap News
MediPharm Labs Posts Q3 Revenues of $5.4 Million, Continues To Post Negative Gross Margins (TDD)
Auxly Cannabis Q3 Revenues Climb To $24.5 Million (TDD)
CloudMD To Acquire MindBeacon For $116 Million In Cash And Shares (TDD)
Bragg Gaming Appoints Former Chair of Ontario Lottery and Gaming Corp. Paul Godfrey as Interim CEO (NW)
Things to Be Watching Out For
Last week was a big week for tech stocks. This week we see Wal-Mart, Target, Home Depot, Lowes, and Victoria’s Secret put out earnings.
Canadian Small Caps With Jay Lutz
After working with Steve for several years, you get to know a few things about him. First, is that he is a terrible multi-tasker. The guy, respectfully, cannot do two things at the same time to save his life, which is a result of him throwing himself deeply into whatever it is he’s doing at any one instant. Second, he loves to go on rants.
One such rant he likes to tirelessly return to, is the absurdity of the telemedicine space in Canada. Certain names, such as Well Health Tech and Skylight Health are often the target of such rants, given that both firms instituted a similar strategy.
Talk up a tech angle to get a large multiple in the markets, while acquiring small clinics and similar assets for 1x sales in the private market, where even that multiple is higher than it traditionally is. Use those clinics to boost topline results, and bam, markets love ya in an age filled with meme stonks, endless money printing, and retail investors that love a good story.
Or at least, they did. The problem for these operators now is that despite countless acquisitions, they are nowhere near sustainable operations and thus need to return to the markets for continued capital to keep the M&A activity going to fuel the growth story and investor interest.
For Skylight Health in particular, whom has seen its share price erode from a high of $9.50 on the Venture to $2.97 today, is that investors don’t particularly like to throw money at you when your value continues to erode. So what do you do when you need further funding?
You get creative.
Last week the company announced out of what appears to be some degree of desperation, that it will be introducing a preferred share via a financing that offers an annual yield of 9.25%, with the company having the option to repurchase the shares after three years at a price of US$25.00 per share.
While further terms of the offering haven’t been released, such as the pricing of the preferreds or the size of the offering as a whole, we have to ask, what are investors thinking?
As we stated in our coverage of the story earlier:
The proposed offering with dividends comes despite the company still not generating positive operations, with the last quarter, ended June 30, seeing revenues of $10.5 million offset by operating expenses of $10.2 million, with a loss from operations of $3.5 million for the quarter. Year to date, the firm has been operationally cash flow negative to the tune of $4.3 million, with the company being supported by repeated financings.
Financings are what have kept this thing afloat to date. The go-to-market strategy of offering preferreds rather than sourcing a simple credit facility or debenture offering suggests that large investors or the banks aren’t convinced of this story at this point, or at least to the degree that they expect to be repaid. And their success to date isn’t overly convincing in their ability to generate meaningful cash flow to fund a sizable amount of preferreds that offer a monthly dividend.
As always with small caps, if it appears to good to be true, it probably is.