TerrAscend: One MSO To Avoid
Summary
- Despite falling $6 recently, TerrAscend isn't an appealing cannabis stock.
- The sudden exit of the CEO after only a year on the job is troubling.
- The stock trades in excess of 10x 2021 sales targets, placing the valuation on the premium side for MSOs.
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Due in part to a partial ownership position by Canadian cannabis giant Canopy Growth (CGC), TerrAscend (TRSSF) has recently reached aggressive valuation levels. The multi-state operator (MSO) isn't positioned for any exceptional growth, but investors likely expect Canopy Growth to buy out the stock when the U.S. approves cannabis at the federal level. Investors should look elsewhere for better bargains in the cannabis space, especially with the CEO suddenly leaving the company.
Image Source: TerrAscend website
Booming Business
Like most MSOs, TerrAscend has seen sales explode in the last year. The company grew 2020 sales by 134% to reach C$198 million while Q4 sales were up 152% to reach C$65 million.
The company recently opened a dispensary in New Jersey and expects to have 3 stores open in the state by Q3. In addition, TerrAscend is one of the few MSOs expanding operations in California with the recent opening of a 5th dispensary in the state.
The MSO is in the process of acquiring the Maryland operations of HMS Health, LLC from Curaleaf (OTCPK:CURLF) to provide for further growth. Ultimately though, TerrAscend has limited operations with a focus on Pennsylvania, New Jersey and the highly competitive California.
Source: TerrAscend March 2021 presentation
In fact, the company is primarily focused on sales in Pennsylvania with 1 of 5 vertically integrated licenses and an estimated 20% wholesale market share in the medical cannabis state. Even with the business in Canada, TerrAscend should obtain the vast majority of 2022 revenues from Pennsylvania and New Jersey, assuming New Jersey fully opens up recreational cannabis sales.
The lack of access to more limited license states reduces the attractiveness of the stock. The MSO is only in a couple of markets with limited licenses. Despite a booming business, the long-term upside appears rather limited and places TerrAscend at a disadvantage on any federal approval and legalization of interstate sales.
Not Worth Premium
TerrAscend is forecasting 2021 revenues will grow over 85% to reach $290 million. The company will transition to reporting in U.S. dollars this year, but the whole investment story is based on whether a Canadian cannabis company will buy them in the future. Canopy Growth has a contingent stake consisting of up to 61.3 million shares and buying the remaining stake would appear logical.
The MSO has a fully diluted share count of 313 million placing the market cap at $3.1 billion while the company only guided to 2021 revenues topping $290 million. Most of the MSOs don't trade anywhere near 10x 2021 sales targets, though the company does have solid 42% EBITDA margins with an adjusted EBITDA target for the year of $122 million.
Analysts have sales surging to $426 million in 2022, but the company doesn't appear poised for much growth outside of the upside from New Jersey. The state is working on launching recreational cannabis and the company is in the process of expanding their network to 3 stores this year and more than doubling cultivation capacity.
Ultimately though, TerrAscend has strong margins due to a focus on a few state markets. The company will be at a disadvantage as the larger MSOs are able to spread out corporate costs to substantially larger operations and utilize best in class cultivation and production techniques learned from work at a larger set of facilities and growing environments.
Takeaway
The key investor takeaway is that the stock has already fallen $6 from the recent highs, but TerrAscend still isn't appealing due to the lack of vertically integrated licenses and the surprise exit of the CEO. Federal legislation could take years and owning the stock on this basis of a buyout isn't appealing while so many other MSOs have major growth plans and continue to build scale in a significant amount of state markets. Investors should look elsewhere for a better MSO value.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (39)
Revenue of $53.4M (+106.2% Y/Y) misses by $1.02M.
So b/c SFC is bearish on one MSO, you think we're making a case for being bearish on all MSOs? My view has been very bullish on $AYRWF, $CURLF and others. This last article was bullish on $CRLBF. seekingalpha.com/...
at this value! Hate investors that drop names and pretend that valuation ins't the biggest part of the equation. Exactly why so many lost their shirts on the Canadians in the first place.
