Cantor's Top Picks: Could Q2 Earnings Provide A Spark For These Cannabis Multi-State Operators?

Multi-State Operators (MSO) traded higher on Tuesday after Cantor Fitzgerald categorized four companies as "top picks." In a recent industry report, Pablo Zuanic analyzed the context of MSOs and offered insight on trends driving financial value. Although MSOs ETF fell 25% in June and 49% over the last three months (vs. a 7% drop for the S&P500), he still finds value in the current context.

The MSOs stock performance seems to be masking “encouraging medium and long-term sales trends,” with more states either legalizing cannabis (New Mexico and New Jersey), soon to start recreational sales (RI, CT/NY), or soon voting to legalize (MD, MO).

In addition, Zuanic noted Illinois could see growth accelerate as more stores open, as in the case of Michigan (+22% seq sales trends based on Apri/May data).

“Given mixed top-line trends top-down, declining prices, and cash flow issues for some, we doubt operating fundamentals will provide a spark for the MSO group's top-down (with the exception of those MSOs where NJ will account for a large % of sales). The second-quarter sales data so far are mixed, showing some improvement top-down in sequential terms (...), but not in YoY terms,” Zuanic wrote.

“We think there is a correctly increasing focus on profit margins and cash flow; wholesale prices are down 16% sequentially, down 20% YTD, and -35% YoY. Cash flow generation remains an issue (with high margins often offset by high-income taxes), and debt leverage is abnormally high for a few MSOs mentioned below,” he continued.

The analyst said the current state of affairs will lead to further consolidation and benefit those in a stronger position.

Yes, valuations are attractive

Cantor’s top picks are Cresco Labs CRLBF proforma (1.7x C23 EV/Sales), Curaleaf CURLF (2.7x), Green Thumb Industries GTBIF (1.6x), and Trulieve TCNNFTRUL (1.9x).

“With the MSO average at 1.5x CY23 EV/Sales (we are putting less faith on EBITDA given restatements, a wide range of methodologies, and in some cases unrealistic guidance), we are less focused on valuation and more on quality,” Zuanic said.

He expects “decoupling” to occur in the group, with an increased focus on Europe, and stocks with exposure in those markets likely to benefit.

“Also, we like the ancillary space, although recognizing mixed fundamentals for MSOs may be an issue for service providers. We see value in the MSO group but would be selective (even though 2Q may not provide the spark needed). With top MSOs trading below 2x CY23 sales, we are buyers here, even though we recognize the group does not seem to find a bottom, the second quarter may not provide the spark needed, and caution investors that meaningful upside could still be 2-3 years away without federal-level reform (only de-scheduling can lead to MSO up-listing, in our view),” Zuanic concluded.

Cash flow and balance sheet

A key metric we will track in 2022 will be operating cash flow and debt leverage. According to Zuanic, the most levered MSOs (taking financial net debt plus leases, and income tax payables) were MedMen at 2.2x (broadly defined net debt on annualized sales) and AYR Wellness AYRWF at 1.4x.

“Three other MSOs were at 0.9x (Ascend AAWH, Columbia Care CCHWF, 4Front Ventures FFNTF). Of the rest, Jushi JUSHF was at 0.6x, but had the highest net interest expense ratio to sales (18%) ex MedMen (25%); TerrAscend TRSSF (0.5x debt to sales) was 3rd on this metric at 14%.”

Zuanic highlighted that “scale will matter.” “If MSOs were to raise 25% of their current market cap in equity, for Cresco, Green Thumb, and Verano VRNOF, this would represent $400-500Mn in proceeds (more than the market cap of other MSOs); about $550Mn for Trulieve, and ~$900Mn for Curaleaf.”

Photo by Kelly Sikkema on Unsplash

Posted In: analyst reportsCantor FitzgeraldPablo ZuanicCannabisNewsPenny StocksSmall CapMarketsAnalyst Ratings

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.