What's In The Cards For Cannabis MSOs In Q3? Analyst's Thoughts Ahead Of Earnings Season

With earnings season underway, investors should be closely watching top cannabis stocks over the coming weeks.

Some of the largest cannabis MSOs in the U.S. are about to publish their quarterly financial reports and Cantor Fitzgerald’s Pablo Zuanic provided third-quarter estimates for the ten companies within the group.

What’s The Main Sector Catalyst?

Considering that the MSOs ETF is down 26% over the last three month period and 51% off the 2/10 peak, “the group is looking for a positive catalyst,” Zuanic said, adding that the third-quarter earnings season is not providing such a catalyst.

On the other hand, the analyst explained in an earlier note that uplisting to major US exchanges is the main catalyst as it will generate greater liquidity and attract large institutional investors.

Without it, “the MSO group may tread water at best in the months ahead,” Zuanic highlighted.

Consolidation Continues

Zuanic expects that the larger MSOs will continue to consolidate the space and benefit, as opposed to smaller operators who will end up handicapped by the regulatory landscape-related issues, such as capital market access, high borrowing costs and restrictive licensing systems.

“The lack of compromise in DC may be hurting those the legalization sponsors intended to help in the first space.” 

3Q Preview For US MSO Group

“The state data, as well as other services (Headset), point to a softening in sales growth after a strong 2Q,” Zuanic explained, adding that most management teams have “hinted to increased price pressures in a few markets.”

Nevertheless, with legal cannabis in the US still being a nascent industry, up 22% year-over-year in the third quarter of fiscal 2021, the analyst expects sales to double from 2021 to 2024 to $44 billion, considering that more and more states are legalizing the plant.

In addition, there is a greater upside long-term, he emphasized, adding that “the CO per capita of $400 would mean a $130Bn market if federally legalized.

Zuanic pointed to Curaleaf Holdings CURLF, Green Thumb Industries Inc GTBIF and Trulieve Cannabis Corp TCNNF as his top picks within the US group.

Key Takeaways From Analyst’s Report

Top picks:

  • Curaleaf 

Zuanic models sales for the year of $1.24 billion with a 3% sequential increase in the third quarter ($321 million versus consensus of $336 million) and 8% in the fourth quarter. He expects EBITDA margins of 26.5% (down 40bp quarter-over-quarter) compared to the consensus of 29%. In addition, the company is “being managed for long-term growth and not for near-term margins.”

The company will “signal 4Q acceleration,” Zuanic opined, as it recently launched flower sales in New York, in addition to increasing capacities. Moreover, with EMMAC sales of $35-40 million, the company “would be in-line with Tilray (TLRY/N) in $s exports,” he added.

  • Green Thumb Industries

The analyst expects minimal margin compression in the third quarter. His EBITDA margin assumption of 35.2% is “only 20bps below consensus and 50bps below 2Q.”

“We believe the stock premium on other MSOs is justified on its mix of breadth and depth and exposure to the east coast’s green wave with ops in PA, NJ, NY, CT, MD, and VA,” Zuanic added.

  • Trulieve

Zuanic projects third-quarter sales of $221 million compared to a consensus of $223 million and EBITDA margins of 40.8% (100bps below consensus), down from 44.1% in the previous quarter.

“The main two things that could help sentiment would be management providing updated and credible insights about Florida’s path to legalizing rec, and whether wholesale will be allowed in the interim in the medical market.” 

Other operators within US MSO Group:

  • MedMen Enterprises Inc. MMNFF - Adjusted EBITDA expected at -1% of sales in the third quarter versus -5% in the prior period and -38% in the first quarter of fiscal 2021.
  • Acreage Holdings Inc. ACRG ACRGF - The sales (including MSA revenues) are expected at $61.7 million in the third quarter.
  • Cresco Labs CRLBF - EBITDA margin target of 30% for the fourth quarter (50% gross margins) and 25% EBITDA margins for the third quarter (up from 21.7% in the prior quarter) compared to a consensus of 24.4%.
  • Columbia Care Inc. CCHW CCHWF (FSE:3LP) - Combined revenues are expected at $136.5 million for the third quarter compared to a consensus of $145.7 million. For the year, Zuanic projects sales of $484 million, which is below guidance. In addition, he projects EBITDA margins of 21.3%, in-line with consensus, and up 7pt sequentially.
  • TerrAscend Corp. TER TRSSF - The analyst expects 3% quarter-to-quarter sales growth to $60.3 million in the third quarter -in line with consensus - in addition to $68.7 million in sales for the fourth quarter, compared to a consensus of $73.2 million.
  • Jushi Holdings Inc. JUSHF - Sales are expected at $56.6M million for the third quarter compared to a consensus of $57.8 million. The analyst modeled a roughly 3pt sequential increase in EBITDA margins to 12.2% compared to a consensus of 14.2%.
  • AYR Wellness Inc. AYR AYRWF - Sales are expected to hit $97 million in the third quarter, versus a consensus of $100 million. Zuanic projects $111 million in sales for the fourth quarter versus a consensus of $124 million. In line with consensus, he projects a 100bps quarter-over-quarter drop in EBITDA margins due to the promotions in Florida and price pressures in Pennsylvania.

Photo: Courtesy of Andrew Neel on Unsplash

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