The Drug Enforcement Administration wants to reschedule marijuana from a Schedule I substance to Schedule III. This move would mean that marijuana would no longer be grouped with ecstasy, heroin and other harmful substances, and would be an acknowledgment that there is some medicinal benefit to the use of cannabis.
For US-based cannabis companies, it would be a big win as it would mean they would be able to take more tax deductions as Section 280E of the tax code would no longer apply.
Three of the largest multi-state operators (MSOs) that would have the most to gain from cannabis realignment are Curaleaf Holdings (OTC: CURLF), Green Thumb Industries (OTC: GTBIF)And Real cannabis (OTC: TCNNF). Here’s a look at each company.
1. Curaleaf Holdings
Curaleaf is one of the largest MSOs in the country, with 145 pharmacies in 17 states. It has a cultivation capacity of approximately 1.4 million square meters. And in addition to the U.S. market, the company has also expanded its presence internationally, recently making its first wholesale shipment to the Czech Republic.
Over the past twelve months, Curaleaf generated nearly $1.4 billion in revenue and incurred a net loss of $275.1 million. This includes a tax provision totaling $113.9 million. However, the cannabis producer consistently posts adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA); for the first three months of the year the adjusted EBITDA margin was 23%, and in the previous period it was 24%.
By reducing the tax burden, Curaleaf will be able to improve its operating results. Chairman Boris Jordan previously called 280E “unfair” and “unconstitutional” for saddling the company with such a burden, even going so far as to suggest that the cannabis industry should consider not paying it in protest.
This year, Curaleaf shares are up more than 10%, but over five years, shares are still down 40%. With a price-to-sales ratio of 2.4, the stock is inexpensive and has room to move higher should investors become more optimistic about the cannabis industry and want to invest in one of the country’s top producers.
2. Green thumb industries
One company that is already profitable today is Green Thumb Industries. Its footprint is smaller than Curaleaf’s, as Green Thumb has 93 retail locations and operates in 14 U.S. markets. The company’s focus on offering a variety of branded cannabis products has allowed it to reach a wide range of customers.
Green Thumb has generated approximately $1.1 billion in revenue over the past four quarters, and despite taxes accounting for nearly 11% of revenue, the company still managed to post a profit of $58.2 million in that period. It also generated $234.3 million in operating cash flow.
Green Thumb’s stronger financials have made it one of the better buys in the sector, as the pot stock is in positive territory over the past five years with a gain of around 1%. It’s modest, yet impressive in a sector where many stocks are often deeply in the red.
Rebalancing would help boost profits and make it an even better purchase. It trades at 2.6 times its trailing sales.
3. Real cannabis
This month, Trulieve reaches a milestone by opening its 200th pharmacy in the country. It takes place on June 14 in Brooksville, Florida. It is by far the largest cannabis retailer, with a footprint that easily surpasses both Green Thumb and Curaleaf.
Trulieve also has a lot to gain from rescheduling cannabis and the lighting of 280E. The company’s chief financial officer, Wes Getman, says Trulieve could benefit significantly from a lower tax bill, adding: “If the 280E burden is lifted, Trulieve could realize hundreds of millions in savings over the coming years.”
Over the last twelve months, Trulieve’s revenues totaled $1.1 billion, and the company paid $171.3 million in taxes. During that period, the company posted a loss of $485.8 million, but that includes a particularly bad quarter a year ago, when Trulieve reported a goodwill impairment charge totaling $307.6 million.
If the company can reduce its taxes, its prospects for profitability would improve significantly. Despite its tremendous growth over the years, Trulieve has also been a disappointing stock to own, with shares down 11% in five years.
The cannabis realignment could result in a more favorable outlook for MSOs, which would result in an improved stock valuation. With only 1.5 times turnover, Trulieve is the cheapest stock on this list in terms of turnover.
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David Jagielski has no position in the stocks mentioned. The Motley Fool holds and recommends positions in Green Thumb Industries and Trulieve Cannabis. The Motley Fool has a disclosure policy.
3 Stocks That Will Benefit Most From Cannabis Rebalancing was originally published by The Motley Fool
