Why Isn't TerrAscend Stock Among This Analyst's Top Picks?

TerrAscend Corp. TER TRSSF recently reported a 16% sequential drop in net sales to $49.1 million and a net loss of $14.6 million in the third quarter of 2021.

And while the management pointed to "muted" sequential growth for the last three months of 2021, Cantor Fitzgerald's analyst Pablo Zuanic announced a new sales estimate of $54 million in his latest note, right in the middle of the FactSet consensus range of $51-58 million.

The Analyst

Zuanic maintained an Overweight rating on the company's stock while raising the 12-month price target to $7.65 from $6.70.

The Thesis

The analyst stressed the company's exposure to the New Jersey recreational market in addition to the finalization of the Gage Growth Corp GAEGF transaction and the "magnitude of the recovery" in Pennsylvania's wholesale business, as main factors that will affect the company's performance in 2022.

"All of these three factors have quite a bit of variability," he added

Gage Acquisition

In September, TerrAscend and Gage revealed their plan to merge in an all-stock deal worth $545 million.

The transaction, which will result in a combined company with operations across five states and Canada, seven cultivation and processing facilities and 23 operating dispensaries, is expected to close in early 2022.

With the approval of shareholders of both entities, Gage's debut on the OTCQX Best Market under the ticker symbol "GAEGF" and a recently confirmed $55 million senior secured term loan, the future combined company is "well-positioned to execute swiftly and drive value for our shareholders," Gage's CEO Fabian Monaco said recently.

And while the Michigan-based cannabis retailer plans to add more stores and capacity in the state, Zuanic emphasized that the Great Lake State "remains quite a competitive" field.

Even though Gage recently reported a record $27.2 million in the third-quarter revenue, the sequential improvement was only 3.2%. According to Zuanic's estimations, that's a 5.5% share in the Michigan market for the quarter.

Monaco's idea to build the "Trulieve of MI," with "less than 6% share," is quite an "ambitious vision," the analyst said, adding that he finds the FactSet consensus estimates for CY22 sales of $268 million for Gage to be high.

New Jersey

TerrAscend formed a partnership with Cookies in New Jersey recently and will exclusively bring the brand's products to the Garden State. The deal came about through Gage Growth, the exclusive Cookies processor in Michigan.

However, with recreational cannabis start date still being a "big question mark" and a "well-developed illicit market," New Jersey has "a lot of moving parts, and we can see a wide range of scenarios," Zuanic explained, adding that he found the company's $40 million estimate for average sales per store too high. Zuanic projected average sales per store of $25-30 million by the fourth quarter of 2022.

Zuanic opined that the company's stock is a "play on NJ rec," having the highest exposure to the state's recreational market rec among MSOs, as % of total sales, and, "also the relationship with Canopy Growth Corporation WEED CGC (20% contingent stake pre-Gage, and 16% post-Gage) in theory protects the relative downside."

Pennsylvania

The company recently revealed that previously disclosed yield issues in PA have been rectified, with the highest quality flower the facility has ever grown hitting the market in recent weeks.

Jason Wild, executive chairman of TerrAscend said he is "pleased with the improvements" made in the Keystone State.

"The ratio of quality flower to trim from recent harvests has increased dramatically," Wild explained. "Additionally, THC and Terpene potency has been testing at all-time highs."

The analyst still questions how quickly the company's the wholesale business will recover.

"One thing is being able to ramp up throughput (due to its own expansion, and after fixing the recent disruptions), and another one is being able to sell that increased throughput after losing significant market share in the third quarter."

Photo: Courtesy of Markus Winkler on Unsplash