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Chart of the Week

Chart of the Week

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.

Week ended 11/10/2023

Viridian Capital Chart of the Week: Revenue and EBITDA Beats are Great, but the Real Story is Cash Flow From Operations

  • Third-quarter earnings releases still have about a week to go. Still, eight companies representing over 78% of the total market cap of the fourteen MSOs with market caps over $100M have reported and appear in the graph below.
    • Four of the eight had small misses on revenue, ranging from 0.1% for Curaleaf (CURA: CSE) to 3.1% for Planet 13 (PLTH: CSE). The beats were a bit larger and ranged from 2.2% for Trulieve (TRUL: CSE) to 7.0% for Green Thumb (GTII: CSE).
    • Six of the eight had EBITDA beats that ranged from 1.6% for Curaleaf (CURA: CSE) to 44.0% for TerrAscend (TSND: TSX). MariMed (MRMD: CSE) missed by 23.8%, while Planet 13 missed by 81.8%.
    • The most frequently mentioned driver for the strong Q3 performance was the opening of the Maryland adult-use market, which drove aggregate sequential quarter revenue increases to 1.5%.
    • Unsurprisingly and consistent with prior quarters, there was virtually no correlation between either revenue or EBITDA beats/misses and stock price changes.
  • However, the most striking aspect of the 3rd quarter releases is the Cash Flow from Operations (CFFO) figures in the graph. The blue bar depicts actual Q2:23 CFFO; the orange bar shows consensus estimates of Q3:23 CFFO; the green bar shows actual Q3:23 CFFO; and the purple bar shows actual Q3:23 CFFO adjusted for increases in accrued taxes.
  • All eight (except PLTH) had positive operating cash flow that was higher in Q3 than in Q2, and all eight beat consensus projections.
  • We expected tightened working capital via reduced receivables and inventory as significant cash flow drivers in the quarter, but that was not true for most companies. Only Curaleaf and Trulieve produced cash from reduced receivables and inventory in the quarter.
  • Instead, one of the quarter’s most significant cash flow drivers was the deferral of tax payments. The purple bar shows income tax payable increases, representing 47%, 56%, 59%, and 65% of CFFO for AAWH, MRMD, CURA, and VRNO, respectively. Without this deferral of tax payments, PLTH would have more than twice as big a negative CFFO, and TerrAscend CFFO would turn negative. Verano (VRNO: CBOE), TerrAscend (TSND: TSX), and Curaleaf (CURE: CSE) would have missed analyst estimates without the tax deferral.
  • Tax deferrals had a minimal (10%) impact on GTII and none on TRUL, but last week, Trulieve announced that they would be accruing but not paying 280e taxes, so we expect this to be a significant driver in future TRUL cash flows.
  • Investors should focus on cash flow from operations instead of revenues or EBITDA. However, not all types of operating cash flow are equal. Investors need to discern which elements are ongoing, repeatable cash flows versus deferrals of payments that will represent cash outflows in the future.