Projected Benefits For TerrAscend Overestimated, Says Cantor & Downgrades Cannabis Stock To 'Neutral'

TerrAscend Corp. TRSSF reported its financial results on Thursday for the second quarter ending June 30, with net sales of $65 million, compared to $50 million in the previous quarter.

Gross Profit Margin was 35.5% as compared to 30.4% in Q1 2022.

Adjusted EBITDA was $5.8 million as compared to $3.3 million in Q1 2022.

TerrAscend shares are down 20% over the past 90 days compared to an 11% drop for the AdvisorShares Trust AdvisorShares Pure US Cannabis ETF MSOS, and a 7% gain for SPDR S&P 500 SPY.

The Analyst

Cantor Fitzgerald’s analyst Pablo Zuanic downgraded their rating on TerrAscend stock to ‘Neutral’ from ‘Overweight’ and lowered their price target to $2.85 from $6.45. 

The Thesis

Zuanic downgraded TerrAscend rating to address lower estimates and sectoral derating.

“We are downgrading TerrAscend on valuation (30% and 50% premium on our CY23 sales and EBITDA estimates to the MSO average),” the analyst said.

The company’s second-quarter sales came out 15% below the FactSet consensus, and Zuanic further believes that TerrAscend offered rich estimates – “there is no guidance, but we are 25% below second half of 2022 sales consensus and 50% on EBITDA.”

TerrAscend might benefit from far-reaching operations across New Jersey and general retail/wholesale growth in the state, as well as Gage expansion in Michigan. It has “recreational optionality in Pennsylvania and Maryland (although so do several other multi-state operators.” Zuanic said, adding that these benefits may be overestimated by consensus.

“We think there are more attractive options in the multi-state operators group to benefit from a likely year-end rally in the space,” Zuanic wrote.

Price Action 

TerrAscend shares were trading 4.80% at $2.4 per share at the time of writing Friday morning. 

Photo: Courtesy of Mikhail Nilov by Pexels