US cannabis stocks have edged higher in recent weeks, but the industry in general is in a bit of a holding pattern, as companies await regulatory movement at the federal level while a number of markets continue to go through growing pains.
PI Financial analyst Jason Zandberg assessed the lay of the land in a sector update on Thursday, calling the current mood a tug-of-war between opposing prospects.
“The US cannabis sector is in an interesting space — there is a strong possibility that new federal legislation will pass before the end of this year which could materially help the cannabis sector while at the same time fundamentals have weakened for the sector as product prices decline and demand softens,” Zandberg wrote.
On the regulatory front, Zandberg said the Safe Banking Act could see a vote in US Congress before the end of the year. Passing the act would effectively open up capital in the form of traditional bank loans to cannabis companies while also potentially allowing public listings on US exchanges.
At the same time, Zandberg said overall revenues across the US pot space were softer during the third quarter and margins came under pressure from falling unit prices, with the analyst predicting more of the same for the current quarter.
“We are reducing our outlook for 2023 with estimate drops from many of the names that we follow. We anticipate that demand will pick up and pricing power will return in the second half of 2023,” he said.
Zandberg is still bullish on the sector, however, pointing to not only the Safe Banking Act but a potential re-scheduling of cannabis at the federal level, where in September, the Biden Administration called for a review of cannabis’ long-time status as a Schedule 1 narcotic. The two events could be major catalysts for the industry in the upcoming year.
Zandberg maintained “Buy” ratings on the following seven stocks, with Zandberg saying PI Financial’s Top Pick status went to Ayr Wellness, based on the expected 520 per cent return. (Note: all figures are in US dollars except where noted otherwise and all projected returns are as of publication date of the PI Financial report.)
Stock: Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A)
Target Price: C$23.00 (unchanged)
Projected one-year return: 520 per cent
Zandberg noted that Ayr Wellness indicated in its Q3 earnings call in early November that the company’s EBITDA should grow by ten per cent in the fourth quarter but did not comment on revenue for the upcoming 2023.
“At that time we reduced our FY23 revenue estimate to $623 million and we have not moved from that position,” Zandberg wrote.
Stock: Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW)
Target Price: C$5.50 (previously C$6.50)
Projected one-year return: 148 per cent
Zandberg said Cresco is expected to complete its acquisition of Columbia Care at the end of the Q1 2023.
“We have dropped our estimates for FY23 revenue to $628 million from $636 million. A minor drop in the top-line, but we have actually increased our EBITDA outlook to $95 million. This equates to an EBITDA margin of 15 per cent which is not high relative to its peers but an improvement over the expected 13 per cent margin in FY22,” he said.
Stock: Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL)
Target Price: C$10.00 (previously C$12.00)
Projected one-year return: 125 per cent
Zandberg said he has softened his outlook for 2023 revenue from Cresco from $979 million to $915 million based on the theme of slower than expected growth for the industry.
“Management indicated that they expect a sequential decline in Q4 revenue relative to Q3. In addition, there was a drag on margins in Q3 as CL closed underperforming assets and liquidated the related inventory. This drag will not impact Q4,” Zandberg said.
Stock: Jushi Holdings (Jushi Holdings Stock Quote, Charts, News, Analysts, Financials CSE:JUSH)
Target Price: C$4.75 (C$5.50)
Projected one-year return: 78 per cent
Zandberg dropped his 2023 revenue estimate on Jushi from $384 million to $352 million and his EBITDA forecast from $60 million to $48 million.
“We recognize that JUSH has a relatively strong outlook as its business in Virginia ramps up next year, but we are still reducing our expectations,” Zandberg wrote.
Stock: Lowell Farms (Lowell Farms Stock Quote, Charts, News, Analysts, Financials CSE:LOWL)
Target Price: C$0.60 (previously C$0.70)
Projected one-year return: 131 per cent
Zandberg said Lowell management was bullish in its Q3 commentary on the outlook for a new product launch, a line of pre-rolls called Lowell 35s.
“We have dropped our 2023 outlook from $66 million in revenue to $59 million in revenue. The new product launch should aid gross margins and thus we are maintaining our EBITDA outlook despite the top-line drop,” he said.
Stock: Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL)
Target Price: C$50.00 (unchanged)
Projected one-year return: 185 per cent
Zandberg relayed that Trulieve management has cautioned that full 2022 revenue is likely to come in at the low end of its guidance.
“As our estimates were already in the low end of the range provided by management we did not change our estimates then and have not changed them now,” he said.
Stock: Verano Holdings (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO)
Target Price: C$18.00 (previously C$22.00)
Projected one-year return: 157 per cent
Zandberg noted that on their Q3 earnings call, Verano management was very bullish on federal cannabis reform while also confirming that market demand had fallen and many markets are softer in the current fourth quarter.
“We initiated coverage of Verano in September 2022 and had a very bullish outlook. Although we maintain our confidence in Verano we have lowered our expectations for 2023. Our new revenue estimate for FY23 is $989 million (previously $1,211 million),” he said.
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