Beaten-Up Planet 13 Is A Solid Cannabis Investment (OTCMKTS:PLNH)

I wrote about Planet 13 (OTCQX:PLNH) in mid-August after it reported its Q2, calling it cheap. It is a bit higher now, but it is down a lot since it exploded higher in early September, more than doubling. It is down again year-to-date and offers investors the best way to invest directly in the American cannabis industry operators. Today, a couple of weeks ahead of their Q3 report, I discuss the chart, the outlook and the valuation.

The Chart

I start with a look at the chart because the stock has been so volatile. When I wrote about it on 8/20, it had closed at $0.485. It ran up to $1.20 on 9/6 after the news that the Department of Health & Human Services had recommended to the DEA that it move cannabis from Schedule 1 to Schedule 3. This bombshell came out on 8/30 and would eliminate 280E taxation if cannabis were to be rescheduled like that.

The stock made an all-time low right after my last article. After shooting up, it has collapsed again and is down year-to-date by 9.4%. Looking at it compared to the AdvisorShares Pure US Cannabis ETF (MSOS), it has done a lot better year-to-date, as MSOS has dropped 25.0%. Over the past year, though, it has dropped 55%, which is more than the 49% decline in MSOS. Since 8/29, the day before the potential rescheduling news hit, PLNH has dropped 3% while MSOS has advanced 8%:

The Outlook

10 weeks ago, analysts, according to Sentieo, were looking for 2023 revenue of $102 million and adjusted EBITDA of $8 million. The two analysts currently still expect revenue to fall 3% to $102 million with adjusted EBITDA now expected to rise 104% to $7 million.

The outlook for 2024 has improved. In mid-August, the two analysts were expecting revenue of $144 with adjusted EBITDA of $18 million, a margin of 12.5%. Now, they project revenue will increase 58% to $161 million. The analysts expect adjusted EBITDA will nearly triple to $20 million, a margin of 12.5%. This is a fairly low margin compared to peers.

As I said in my last article, 2024 should show big progress. Florida will be turned on, and the Illinois store near the Wisconsin border will be contributing too. The company is a large player in Nevada and a small one in California, and how these markets perform will also impact the business in 2024.

There are no estimates for 2025 yet.

The Valuation

10 weeks ago, I shared a target of $0.83 for year-end based on reaching an enterprise value to projected adjusted EBITDA for 2024 of 8X. I also pointed out that the stock was trading at just 1X tangible book value, which was significantly better than peers.

Here is how Planet 13 compares to the Tier 1 and Tier 2 MSOs on enterprise value to projected adjusted EBITDA for 2024:

Planet 13 trades below the average of 5.1X at just 4.2X. It is the only company among these to have net cash, and it is trading currently at just 1.1X tangible book value. The next closest MSO is Green Thumb Industries (OTCQX:GTBIF), which trades at 3.5X. Historically, investors have not minded paying up a bit for the better balance sheet, and I think that they should do so currently given the capital-raising challenges the industry faces.

A year from now, the stock will be trading in my view at a multiple of projected 2025 financials. As I pointed out above, these aren’t yet available. My expectation is that analysts will project that revenue will grow a bit and that margins will expand. Raising the 2024 revenue projection by 10% and boosting the adjusted EBITDA margin to 14% would yield projected adjusted EBITDA of $25 million. The current price would suggest that this would be an enterprise value to adjusted EBITDA of 3.4X. I think that 7X is a conservative ratio at the end of 2024, and this would represent a stock price of $0.96, 73% higher than the current price.

Conclusion

If the DEA moves cannabis to Schedule 3, it’s good for Planet 13, but that move would be more helpful to the companies that are weaker financially. If there is no change and 280E remains, it will be very tough on cannabis operators. I see Planet 13 as having considerable upside but limited downside. The stock is one of the only U.S. operators that trades near tangible book value, and its valuation relative to projected revenue or adjusted EBITDA is low relative to peers.

The 2024 growth is expected to be very strong, and I think investors will start paying attention to this as 2023 ends and 2024 ends. Looking out a year, I think that they will start to focus on the 2025 estimates, which should be released in March by the analysts. I include a large position that I increased substantially this week in both of my model portfolios.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.