Why I Still Like Planet 13 Stock As A Cannabis Investment (OTCMKTS:PLNH)

I am not very optimistic about MSOs right now, but I continue to like Planet 13 (OTCQX:PLNH), holding it in both of my model portfolios that I share with subscribers in my investment group. I last wrote about the company here in late October, calling it a solid cannabis investment. The stock has rallied significantly since then, but I still like it. In this follow-up, I assess the fundamentals, take a look at the chart and discuss the valuation.

The Outlook for Planet 13 Is Strong

That last review I shared was ahead of the Q3 report on November 8th. The company ended Q3 with cash of $36.8 million and debt of less than $1 million. Tangible book value ended the quarter at $105.4 million.

The Q3 report showed revenue that was below the expectation of $26 million, with it shrinking by 3% to $24.8 million. Adjusted EBITDA of $230K was down from a year ago but better than the forecast by the one analyst of -$2 million.

Planet 13 does not have very broad coverage by analysts. There is currently no 2025 estimate, and just one analyst has provided an estimate for 2024 according to Sentieo. Ahead of the Q3 report, there were two analysts following the company and providing estimates, still a low number. On the Q3 conference call, Doug Cooper from Beacon Securities was the only analyst to ask a question. On the Q2 call, there were no questions at all! I think that this signifies that the stock isn’t that much in favor with investors.

For 2024, two analysts had projected ahead of the report that revenue would be $161 million with adjusted EBITDA of $20 million. Now, the forecast by one analyst remaining is for revenue to grow 41% to $144 million with adjusted EBITDA growing 124% to $18 million.

The 2024 estimate looks very reasonable to me. Investors should remember that the Florida acquisition will be included. In 2023, the company booked no revenue in Florida. Additionally, Planet 13 opened a store in Illinois near the Wisconsin border in December that will be open the full year. Its main market, Nevada, has been weak for a while and could come back a bit. Its other market, California, could also see some expansion.

There is no estimate for 2025. My own projection is that revenue can increase 10%, which would be $158 million. I am assuming the adjusted EBITDA margin will expand to 14%, the level the company earned in 2014 but a discount to peers. This would suggest $22 million.

There are a couple of things going on that investors should monitor. The first is the still-pending acquisition of VidaCann in Florida, a deal that was announced in late August and is expected to close in Q1. The company has announced a potential disposition of its current license in Florida for $9 million cash. The VidaCann deal involves the issuance of 78.46 million shares and a cash payment of $4 million. The company will also owe $5 million in debt. So, the license sale will fund 100% of the cash obligation, and the shares issued, which would have been valued at $0.507 when the deal was announced, are now worth considerably more.

The VidaCann acquisition was valued at $48.9 million at the time of the purchase. In March 2019, the firm had agreed to be acquired by Cresco Labs (OTCQX:CRLBF) for $120 million in cash and stock. In June, it had a dozen stores operating in Florida. It now has 26, 4.2% of the dispensaries operating in the state. Planet 13 has developed several dispensaries, none of which are open yet, since it entered the state after buying a license from Harvest ahead of the merger with Trulieve (OTCQX:TCNNF). The company discussed the big opportunity for a store in Miami if the state adopts adult-use legalization, which may happen in November. The recent investor presentation from November highlights this and more.

Planet 13 has had an issue with its cash that was first disclosed on November 17th, after the Q3 report. The company has recovered some of the cash that it believes was misappropriated by El Capitan Advisors, which it engaged in June 2021 for cash management services for $22 million. The company will be restating 10-K for 2022 and the three 10-Qs it issued for 2023. Ahead of that disclosure, the company said on January 23rd:

While this matter has resulted and will continue to result in some additional near-term expenses, the Company does not expect this incident to have a material impact on its current business operations or its ability to fund the anticipated working capital and other liquidity requirements of its near-term ongoing operations.

It seems that Planet 13 should recover this cash, though it’s not clear that it will. Even if it doesn’t get the $16.5 million it is seeking from El Capitan, the company will still have more cash than debt, unlike all of the major MSOs. The upcoming restatements will lower their cash balances.

The Planet 13 Chart Is Promising

14 months ago, I wrote about Planet 13 for the first time, saying it could do better in 2023. Looking at the performance relative to the Tier 1 and Tier 2 MSOs since then, the stock has declined 44%:

Planet 13 is worse than all of these other MSOs except for one. The average return of the Tier 1 and Tier 2 MSOs since 12/12/22, which was when that article was published and just after the peak in Q4 prices, has been 6.4%.

Looking at the past two years, the stock shot up a lot in September, but then it pulled back substantially. It is down over 77% over the past two years:

I see support at $0.60, the recent low and also the low in late 2022, when the stock had plunged from $1.15 when I wrote that article to what I viewed as an attractive price at that time. I see resistance at $0.90, a little higher than the current price. This looks like a bottoming chart to me.

Planet 13’s Valuation Looks Attractive

As I said in the October article, I think that price at the end of 2024 will be based upon the expected 2025 results, and there are no estimates currently. Looking at the stock relative to peers for the 2024 expectations, it is priced in line with the average on an enterprise value to adjusted-EBITDA basis:

So, for those looking in the past, 13.6X enterprise to projected adjusted EBITDA for 2023 is quite high! The larger peers trade at an average of 6.3X for 2025 projections. Using my own forecast, Planet 13 trades at 5.0X, a slight discount despite the superior balance sheet and higher growth potential.

What I like about Planet 13, besides the strong growth expected, is that the balance sheet is unrivaled. Even if they don’t recover the cash discussed above, the tangible book value would still be about $85 million. This is quite low relative to its market cap at 1.8X instead of 1.5X. The company would still have net cash. All of its peers have net debt, and some have negative tangible book value.

As I have been communicating for several months, my targets for MSOs are based upon 280E going away or remaining. This depends on what the DEA does. Again, the Department of Health & Human Services recommended in late August that it move cannabis from Schedule 1 to Schedule 3. We still do not know what will happen or when.

In the optimistic scenario of 280E going away, I project that it could trade at 8X. In the pessimistic scenario, it could drop to 4X. These targets, assuming the company keeps its cash on the books at Q3, work out to $0.95 and $0.56. Note that I have not incorporated the higher-share-count or the potential revenue in Florida yet. While 8X is low, hitting that target would suggest upside of 46%, while the pessimistic target would represent a 14% decline. These returns are better than I project for peers.

For those that are highly confident 280E will end, there are better returns from peers in my view. My 8X estimate, though, is probably too low. Getting to 12X would represent a price of $1.34, a gain of 106%. Beyond a potentially higher multiple, the company could have substantially higher earnings. I have not incorporated adult-use legalization in Florida into my estimate, but I believe that Planet 13, with lots of experience in adult-use in Nevada and California and more recent experience in Illinois, could do very well under that scenario.

Looking at the price action in the 3 largest players by stores and by units sold in Florida recently, investors seem excited about the prospect for adult-use in that state:

One aspect of the cannabis industry that has constrained it is the difficulty in doing mergers. The Cannabist/Cresco Labs merger fell apart after more than a year. The issue is that the states regulate the industry, and some states have very strict rules about the maximum number of dispensaries or the square footage of cultivation. I like that Planet 13 should not be constrained if it wants to sell the entire company or parts of itself.

Conclusion

I added PLNH back to my Beat the Global Cannabis Stock Index model portfolio at $0.80 on January 23rd. It is currently 9.5% of the model portfolio, and it’s not in the index. My average cost is $0.774, with all purchases made at $0.705-$0.81. In my Beat the American Cannabis Operator Index model portfolio, it is currently 24.5%, with an average cost of $0.752. It is in the index that I am trying to beat, but at a much smaller weight.

The MSOs seem like they are ahead of the potential good news, though they will likely rally further if the DEA reschedules cannabis to Schedule 3 and wipes out 280E taxation. The 7 MSOs in the index, 33% of the stocks included on the rebalancing in late December, represent 43% of the New Cannabis Ventures Global Cannabis Stock Index by weight currently. I include 3 MSOs in my model portfolio that is beating that index so far in 2024, and they total just 20%.

As cautious as I am regarding the MSOs, I own a position there in PLNH despite it not being in that index. I have shared the reasons I like the stock despite its rally, especially relative to peers. Less downside, in my view! It has the best balance sheet, and it is run by real business people. I see a lot of upside, as I described, and my view may be too conservative, as I explained.

If 280E does not go away, there is a risk to the entire sector, and this could bring the price of PLNH down considerably. I have discussed some other risks, including the potential loss of a big portion of the cash they reported in Q3. Another risk is that the VidaCann acquisition in Florida doesn’t close. My estimates for 2025 are just my own guesses, and the company may not meet them.

So, Planet 13 is not widely followed by analysts. I have followed the company closely since it went public, and, while I am not a fan of MSOs right now, own it in 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.