The marijuana sector is (in)famous for its persistent lack of profitability. Given that, it can be hard to find a company that at least occasionally lands in the black on the bottom line.
And even though such rare creatures exist, ones with a forward price-to-earnings (P/E) ratio under 20 are extremely scarce. They can be found, though — I give you multi-state operator (MSO) Trulieve Cannabis (OTC:TCNNF) and top marijuana picks-and-shovels play Scotts Miracle-Gro (NYSE:SMG).
Old-timers like me can remember when Amazon was essentially a bookseller. That company’s expansion into a retailing behemoth, very roughly speaking, mirrors how Trulieve seems to be coming along. From its roots as a medical cannabis operator in Florida (since that state still hasn’t legalized recreational weed), Trulieve is turning into a major national MSO before our eyes.
At the moment, the company owns, operates, or is affiliated with 164 dispensaries. Granted, the vast majority of these — 114, to be exact — are located in Trulieve’s traditional power base. But the Sunshine State is very populous, and the company is dominant there with an estimated 50% market share.
That’s far ahead of any competitor, and it puts Trulieve in an ideal position to capitalize on recreational legalization… which, by the way, is supported by anywhere from 59% to 64% of Floridians, according to various recent polls.
As for the company’s other states, it has established a nice, fat footprint in limited-license Pennsylvania, with a relatively strong network of 19 stores. In Arizona, where Trulieve swooped in when it acquired local company Harvest Health & Recreation in a $2.1 billion deal last May, 17 of its dispensaries keep customers abuzz with product.
Pennsylvania is in the running to be the next domino to fall with recreational legalization, while Arizona’s kicked in just over a year ago. So Trulieve is well placed in, respectively, a populous market likely on the cusp of recreational sales, and one where such commerce started very recently. This combination alone bodes very well for the company’s future.
Last November, Trulieve delivered its 15th consecutive quarter with a net profit — quite the achievement given how elusive positive bottom-line numbers still are in the weed industry.
Fueled by both organic growth and its frequent acquisitions, the company managed to lift its net revenue by 64% year over year to $224 million. More impressively, despite the high price tag of the Harvest Health buy, it managed a 7% increase on the bottom line to $18.6 million.
Life isn’t simple for marijuana companies, but Trulieve is making it look easy. With the general bearishness clawing at the cannabis sector these days, even this company’s stock price has fallen. I think it’s a steal at a forward P/E barely above 19, and a stock price languishing at $25.40 a pop.
2. Scotts Miracle-Gro
Speaking of transformation, Scotts Miracle-Gro — once upon a time known primarily for its namesake plant growth supplement — has turned into a go-to equipment supplier for the marijuana industry. This propelled its stock price to all-time highs in 2021, and we’re only getting started; even after that rise, its forward P/E is less than 18%, a very low number given its excellent prospects.
The power plant food in Scotts’ tool shed is Hawthorne Gardening Company, the cannabis cultivation equipment subsidiary.
Founded in late 2014 (perfect timing to take advantage of the legal marijuana revolution in North America), the subsidiary quickly became a key part of its parent’s business. In the company’s fiscal 2016, it was responsible for less than 5% of Scotts’ net sales; five years later, that figure was almost 25%.
Over that stretch of time Hawthorne’s net sales ballooned more than eight-fold, to over $1 billion. By comparison, Scotts’ U.S. consumer division (basically the traditional gardening supplies that still form the core of its business) crawled up from a bit more than $2.5 billion in fiscal 2016, to a shade under $2.9 billion.
The company’s savvy management is well aware of the value of its prize asset. It keeps making acquisitions and other investments to beef it up, a recent example being the buys of two specialty businesses, Luxx Lighting and liner/storage solutions company True Liberty Bags.
In announcing its fourth-quarter and full-year fiscal 2021 results last November, Scotts disappointed some investors with its non-GAAP (adjusted) profitability guidance. On a per-share basis, the company is forecasting $8.50 to $8.90 in the metric for this fiscal year, down notably from 2021’s $9.23.
But analysts are predicting better times ahead. Collectively, according to data compiled by Yahoo! Finance, they believe Scotts will recover to the tune of $9.56 per share in fiscal 2023, which is a 7% to 12% year-over-year improvement over the company’s 2022 crystal ball gazing.
And that’s only for 2023. Imagine how much better Scotts will do, in the likely down-the-road scenario, once Congress finally passes meaningful marijuana decriminalization/legalization reform (along with some form of the SAFE Banking Act). At that point, Hawthorne’s historically robust growth rates will look tiny when matched against the windfall sure to come.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.