The Biden administration announced recently that it would reclassify cannabis from the most restrictive drug enforcement category to a lesser one. Despite many states legalizing the drug over the last decade, cannabis has remained a Schedule I drug, alongside heroin and cocaine, at the federal level. The reclassification to Schedule III is, as President Biden stated in his announcement, "monumental" and has major implications for the U.S. cannabis industry.
As a Schedule I drug, the cannabis industry faces major hurdles to running a profitable business. First, when paying taxes, a business involved in the sale of cannabis or cannabis products can't deduct basic expenses; they pay taxes on their gross income, not net. After reclassification, cannabis businesses will see a substantial bump in their bottom lines.
Second, banking is difficult, if not impossible. Although rescheduling won't change this on its own -- Congress still has to pass a bill known as the Secure and Fair Enforcement Regulation Banking Act (SAFER Act) -- its passing seems more likely after the move. As it stands, most banks won't work with cannabis operators, barring them from accessing services essential to running a business, like opening a line of credit. Only about 10% of banks will deal with cannabis at all, and many tack on big fees to offset compliance costs. Passing the SAFER Act would mean a seismic shift in the financial operations of U.S. cannabis operators.
Who would benefit most from these changes? Well, the entire industry, but I believe this cannabis stock is in the best position to profit.
Green Thumb is already in the black and growing
Green Thumb Industries (OTC: GTBIF) is one of the largest U.S. cannabis operators and one of the few that manages to turn a consistent profit; it's been in the black each year since 2020. The company is a consumer packaged goods (CPG) company and retailer, operating 92 storefronts across 14 states.
The company is growing, its latest report shows an 11% rise in revenue for Q1 compared to last year, and critically, it is profitable. Although right now its profit margin is slim, it netted just $3.4 million last year, its competitors are not fairing so well: Verano Holdings lost $12.5 million while Curaleaf lost $20.9 million.
The company's debt is under control
Green Thumb is disciplined in its approach to debt. It has grown its operations without over-extending itself. It has the lowest debt-to-equity ratio of many of its competitors, a critical measure of a business's ability to thrive. Take a look at this table showing the differences.
| Company | Debt-to-equity ratio (lower is better) |
|---|---|
| Green Thumb | 0.46 |
| Verano Holdings | 0.87 |
| Curaleaf | 1.64 |
And critically, it seems the company is not looking to take on more debt any time soon. Greenthumb has been investing in growth over the past several years and is now looking to reduce its capital expenditure moving forward. In its 2023 report, CEO and Chairman Ben Kovler stated he is "pleased to report that in 2023, we completed our major capex program" and that "the heavy lift [is] behind us."
This puts it in a prime position to take advantage of the bump in cash when it does not have such a high tax burden after rescheduling. Instead of servicing debt or capex, Green Thumb can use the cash to benefit investors, like a stock buyback.
A major tax reduction means a major boost to the bottom line
So just how much would the lowered tax burden affect the company's bottom line? Last year, Green Thumb paid over $118 million in taxes on an income of $156 million, a 76% tax rate. It's certainly not a one-to-one comparison, but for context, let's use a non-cannabis retailer as a benchmark, say Target. The company had a rate of just 18.7%. If Green Thumb pays the same rate, it would mean a savings of roughly $89 million. That's a serious change to the company's bottom line.
With its current profitability, consistent growth, and favorable debt position, I believe it is in the best position to take advantage of the impending reclassification. It is a buy, but investors should proceed with caution. The cannabis industry is notoriously volatile, and although the regulatory winds seem to be headed one way right now, that may not always be the case.
