A very compelling picture is forming in the US cannabis sector, according to investment bankers PI Financial, who delivered an update to clients on the space on Wednesday. Analyst Jason Zandberg says he’s still bullish on a number of companies in the sector but multiple contraction across the space has necessitated a decrease on some target prices. Second quarter earnings season is now over and the Q2 was a better one for cannabis, where top and bottoms lines for a wide range of companies saw sequential improvement. Zandberg said the average revenue growth for the 20 largest US companies was 7.3 per cent compared to the Q1 and EBITDA was up 7.5 per cent on average. At the same time, Zandberg said management for a number of companies revised downward their guidance for the second half of the year, citing the impact of inflation on consumer spending, softness in the wholesale market and a lack of visibility at the macro level as reasons for the dimmer picture. Inflationary pressures as well as supply chain constraints have hit US companies, putting pressure on margins, while the wholesale market in many states and jurisdictions has been a problem, with oversupply occurring in states like California. Nevertheless, Zandberg remains optimistic on the H2 2022, saying that current trading levels represent an attractive ground-floor opportunity for investors to accumulate positions in US multi-state operators, particularly those larger names with more established operations and better balance sheets. Moreover, Zandberg says indication of a move on legalization at the US federal level could do a lot for the pot stocks. “Overall, the sector posted strong revenue growth relative to the weaker Q1 earnings season but stock prices in the sector fell further to the downside. We are still bullish on this sector but recognize that cannabis stocks are out of favour which has led to all-time low valuations,” Zandberg wrote. “We have adjusted our price targets to fall in-line with the multiple contraction, but we believe the upside potential is very compelling — we just may need some legislative breakthroughs to fully realize the full gain,” he said. Zandberg outlined his take on six companies in the space, with Ayr Wellness remaining his Top Pick in US cannabis. (All figures in US dollars except where noted otherwise.) Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A) Rating: Buy (unchanged) 12-month Target Price: C$30.00 (unchanged) Expected 12-month Return at the time of publication: 431 per cent Ayr Wellness has operations in Nevada, Massachusetts, Pennsylvania, Arizona, Ohio, Florida, New Jersey and Illinois. For the second quarter, revenue was up 20.6 per cent year-over-year to $110.1 million, while adjusted gross profit fell by 6.2 per cent to 51.9 per cent, with price compression in competitive markets lowering wholesale revenues. Zandberg said Ayr’s healthy balance sheet will allow for growth opportunities up ahead. “Ayr expects future growth in 2023 through increasing sales in states like Massachusetts and New Jersey, in addition to having cultivation assets come online in Massachusetts in H1/23. The Company expects upgrades on wholesale to further contribute to top line and remains confident about its growth strategy,” he wrote. Lowell Farms (Lowell Farms Stock Quote, Charts, News, Analysts, Financials CSE:LOWL) Rating: Buy (unchanged) Target: C$0.70 (previoiusly C$1.10) Expected Return: 169 per cent At the smaller end of the scale of PI Financial’s coverage, California-based Lowell Farms is a premium craft cannabis producer with a number of brands. The company saw a drop in CPG revenue over the Q2, Zandberg noted, but Lowell will have two new states coming online over the third quarter, namely, Colorado and New Mexico, through their partner and regional grower Schwazze. “While we believe in the long-term potential of the California cannabis market, it has become clear that we were too optimistic by assuming the over-supply situation that started late last year would only take a few quarters to rectify,” Zandberg said. “We are now projecting a longer recovery cycle that will take until mid-next year to return to our growth and profitability metrics. We have reduced revenue outlook in 2022 from $63.9 million to $55.4 million and do not expect positive EBITDA until Q4/22 at the very earliest,” he said. Trulieve Cannabis (Trulieve Cannabis Stock Quote, Charts, News, Analysts, Financials CSE:TRUL) Rating: Buy (unchanged) Target: C$50.00 (previously C$60.00) Expected Return: 163 per cent Florida-based juggernaut in US cannabis, Trulieve saw revenue climb 49 per cent year-over-year to $320.3 million for its Q2 and up just one per cent sequentially. But management lowered its full-year guidance on macro pressures, adjusting revenue down by five per cent. Zandberg noted management’s decision to switch from bulk sales to branded retail revenue. “On its earnings call the Company reiterated that it continues to pursue strategic and accretive acquisitions amid the current environment of discounted valuations. Trulieve commands ample dry power to take advantage of discounted buying opportunities going forwards,” Zandberg said. Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW) Rating: Buy (unchanged) Target: C$6.50 (previously C$7.00) Expected Return: 141 per cent New York-based Columbia Care operates in 18 US jurisdictions and has 99 dispensaries and 32 cultivation and manufacturing facilities along with a range of brands. The company is set to merge with Cresco Labs, with an announcement coming soon and the deal having received in July approval from CCHW’s shareholders. Columbia Care had five percent sequential revenue growth in the second quarter to $130 million. Zandberg said the outlook for CCHW is complicated by the need for divestitures ahead of the Cresco merger. “Management did provide some guidance (see above) which we have incorporated into our analysis. Overall, we reduced 2022 expected revenue from $592 million to $524 million. We have also reduced our EBITDA forecast to match management's more conservative outlook by assuming an 11 per cent EBITDA margin in Q3 and a 13 per cent EBITDA margin in Q4,” he wrote. Jushi Holdings (Jushi Holdings Stock Quote, Charts, News, Analysts, Financials CSE:JUSH) Rating: Buy Target: C$5.50 (previously C$6.50) Expected Return: 135 per cent Boca Raton, Florida-headquartered Jushi has presence in seven states including core markets in Pennsylvania, Illinois, Massachusetts, Virginia and Ohio. The company reported strong topline growth of 52.4 per cent year-over-year in its second quarter to $72.8 million, which was above the consensus call of $69.4 million, although EBITDA was lower than expected at $0.5 million. Zandberg noted that while management has reduced its guidance for the second half of the year, it’s also aiming to grow its presence in both Pennsylvania and Virginia while putting out more products. “The Company is producing many new product strains according to management on its earnings conference call, which will bolster top-line and margins. In Massachusetts, Jushi will be releasing a new chocolate line in September 2022 and in early Q4/22, the Company plans the launch of a line of vegan cannabis chewable products,” Zandberg wrote. Cresco Labs (Cresco Labs Stock Quote, Charts, News, Analysts, Financials CSE:CL) Rating: Buy (unchanged) Target: C$12.00 (previously C$15.00) Expected Return: 121 per cent Chicago-based Cresco Labs, which has operations across ten states, including 20 production facilities and 44 dispensaries, reported Q2 revenue of $218.2 million, up four per cent year-over-year and up 1.9 per cent sequentially and driven by strong wholesale revenue growth. Cresco is the lead seller in the US when it comes to branded cannabis products with a leading market share in the flower, concentrates and vape categories. Zandberg noted that Cresco expanded its market share in every state except California over the quarter and he said a significant event for the company over the second half will be the expected close of its major acquisition of Columbia Care. “During the Company's earnings conference call, Cresco reiterated its commitment to closing this transaction during H2/22 and reiterated that growth over the next three years will come from the transition to adult use in seven large markets: New Jersey, New York, Pennsylvania, Ohio, Virginia, Florida and Maryland. The acquisition of Columbia Care will give the Company exposure to all these markets as a market leader,” he wrote.