Top Marijuana MSOs Amid Earnings Season: Analyst Shares Key Takeaways From Q3 Reports & What They Mean

Cantor Fitzgerald's Pablo Zuanic has crunched Q3 earnings numbers for two cannabis MSOs following Auxly Cannabis Group Inc.'s XLY CBWTF and Columbia Care Inc.'s CCHWF quarterly performance reports.

Cresco Labs Inc CRLBF

The analyst retained an "Overweight" rating on the company's stock while keeping his price target of $15.

Even though the company reported a 2% year-over-year and  4% sequential decrease in the third quarter revenue to $210 million and a slight drop in gross profit, Zuanic focused on the pending acquisition of Columbia Care.

The $2.1 billion deal was announced in March and is expected to give Cresco the largest annualized Pro-forma revenue in cannabis at over $1.3 billion and a strategic and broad footprint comprising 18 states.

Considering recently signed definitive agreements by Cresco and Columbia Care to divest certain New York, Illinois, and Massachusetts assets to an entity owned and controlled by Sean "Diddy" Combs, the closing of the acquisition is expected shortly.

The move "meaningfully increases the probability that Cresco's deal to acquire Columbia Care will close" early next year, Zuanic said in his recent note.

As part of the transaction, Columbia Care also needs to divest additional assets, including its vertical operations in Ohio, its Maryland-based processing unit and the Florida paper license.

"Cresco may opt, although it is not required, to also sell part of its assets in FL and PA for efficiency purposes," Zuanic said earlier.

Subsequent to the end of the quarter, Cresco entered a deal to divest its assets in New York, Illinois and Massachusetts for $185 million.

Commenting on the management's expectations of a sequential decline in the fourth quarter of 2022, the analyst identified "traditional seasonality and a continued focus on verticality by their MSO peers" as primary reasons.

However, new store openings in Florida and unique shops in Pennsylvania and Illinois would lead to retail and wholesale growth in 2023.

TerrAscend Corp. TER TRSSF

Zuanic maintained his "Neutral" rating on the company's stock and a price target of $2.15.

The company's management reported both sequential and year-over-year increases in net revenue and significant improvement in adjusted EBITDA, which came positive for the third quarter at $11.3 million.

While it expects "muted" growth in the fourth quarter, the company's management expects to benefit from operations in New Jersey, Michigan, and Maryland, adding Cookies and Gage products to the "wholesale menu" in Pennsylvania, the analyst said.

Other key takeaways from the meeting with TerrAscend's management include a stronger relationship between the company and Canopy Growth Corp. CGC and Terrascend's expectations to list on the TSX in 6-12 months.

The Canadian cannabis giant recently transferred its TerrAscend assets to Canopy USA company. Canopy announced the creation of Canopy USA last month as part of its effort to consolidate its U.S. assets into a new holding company to speed up its entry into the U.S. market. The move is expected to result in the reduction of costs and entering into the U.S. market, which is projected to be more than $50 billion by 2026.

Photo: Courtesy of Kindel Media by Pexels

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