The cannabis business in the United States turned over a new leaf this year on April 22, when the U.S. Department of Justice and the U.S. Drug Enforcement Administation announced that marijuana was being rescheduled from a Schedule I controlled substance to a Schedule III substance.
The move meant that 280E of the Internal Revenue Code, which prohibited cannabis companies from deducting certain business expenses, would no longer apply. The rescheduling applies to medical marijuana -- for now. However, hearings, scheduled to begin June 29, will be held to determine whether all cannabis, including recreational cannabis, should be moved to Schedule III.
It's a huge change for the industry, and in the first quarter since that announcement, two of the largest pot retailers, Trulieve (TCNNF 7.62%) and Curaleaf (CURLF 5.01%), are among the early winners, with their shares rising more than 50% over the past three months.
Why I like each stock, especially with the repeal of 280E for marijuana companies.
Image source: Getty Images.
Trulieve: Bigger can be better
Trulieve has more than 240 dispensaries, making it the largest multi-state operator (MSO) in that category. CEO Kim Rivers said during her company's first-quarter earnings call that the reclassification action opens new growth opportunities.
OTC: TCNNF
Key Data Points
Trulieve is back to being profitable, and the tax benefits of the rescheduling haven't been fully optimized. In the fourth quarter of 2023, the company filed amended tax returns for 2019, 2020, and 2021, claiming $143 million in federal refunds and $31 million in state refunds. The company is awaiting its challenge, and whether 280E relief will extend to tax years before 2026 remains to be determined.
In the first quarter, the company reported revenue of $287 million. While that was down 4%, year over year, thanks to improved margins, Trulieve had $2.4 million in net income, or $0.01 in earnings per share (EPS), compared to a loss of $32.9 million and an EPS loss of $0.17 in the same period a year ago.
With $353 million in cash and $293 million in cash, it is well-positioned to expand its operations.
Trulieve's unparalleled vertical integration in Florida
The company controls a huge share of the Florida medical market, operating nearly 170 dispensaries in the state. This high density allows for unparalleled vertical integration. By handling everything from cultivation to retail distribution locally, Trulieve achieves economies of scale that protect its gross margins far better than competitors operating thin footprints across dozens of fragmented states.
While Florida remains a medical-only market for now, Trulieve's infrastructure is perfectly positioned to capture exponential volume growth whenever adult-use conversion occurs.
Curaleaf has a big global impact
While many MSOs are strictly bound to the U.S. map, Curaleaf has aggressively built a dual-engine growth model by establishing a massive footprint in Europe. In its first-quarter earnings, the company's international revenue grew 35% year over year to $47 million, driven in large part by the liberalization of adult-use cannabis in Germany. The company just completed its full buyout of German subsidiary, Four 20 Pharma.
By 2027, with the opening of cannabis sales in Turkey, Spain, and France, the company will be in 16 countries, giving it a total addressable market comparable to the U.S.
OTC: CURLF
Key Data Points
The company has 164 dispensaries in the U.S., spread across 15 states, and is in a good position to adapt to states that move from medical-use only to adult-use.
Curaleaf is at a turning point of profitability
In the first quarter, the tax benefits of the 280E shift are beginning to show with the company reporting $69.8 million in net income, or $0.09 in EPS, compared to a loss of $60.3 million and an EPS loss of $0.08 in the same period a year ago.
The company continues to grow revenue, reporting $324 million in the first quarter, up 4.5% year over year.
Trends favor these two big MSOs
The cannabis sector is experiencing its most concentrated dose of federal momentum in decades. Because of Trulieve's and Curaleaf's size and liquidity, they are positioned to expand as legal dominoes fall.
If the hearings conclude successfully by mid-July as anticipated, it could pave the way for full 280E elimination across all revenue streams by late 2026, creating a structural step-change in free cash flow generation and potentially setting the stage for eventual major exchange up-listings. Being on a major exchange instead of over the counter would mean more institutional investment in the companies, lifting their share prices.
