Based in Mississauga, Canada, TerrAscend Corp. (TRSSF) is a cultivator and seller of medical and adult-use cannabis in the United States and Canada. The company has vertically integrated operations in New Jersey, Pennsylvania and California, licensed operations in Maryland and licensed production in Canada. Shares of TRSSF have soared 127.5% over the past nine months because of its cultivation expansions and operational tailwinds.
However, its stock has retreated 13.4% over the past month. In fact, TRSSF’s stock is trading 38.3% below its 52-week high of $16.25, which it hit on February 22.
While investors remain optimistic about TRSSF’s strategic acquisitions in Maryland and Pennsylvania, the company has been burning cash. It has a weak cash balance and negative profit margin. Furthermore, because federal legalization of cannabis is gaining steam, competition in the cannabis industry is expected to intensify.
So, here is what we think could influence TRSSF’s performance in the near term:
Challenges in the Cannabis Space
In May, Jerry Nadler, House Judiciary Committee Chairman, reintroduced the Marijuana Opportunity Reinvestment and Expungement Act of 2021 (MORE Act) to decriminalize cannabis, eliminate criminal penalties associated with the use of marijuana and create social equity components for impacted communities. The bill failed to advance in the Senate the last time it was introduced. On this occasion, there is again little reason to be certain that the bill will be passed in the Senate.
Furthermore, with more states enacting cannabis legalization, more cannabis producers can now operate across state lines. This could intensify competition in this space. With new entrants rapidly expanding their footprints, TRSSF’s market share could be negatively impacted.
Recent Acquisitions Can Increase Expenses
On May 4, TRSSF completed its acquisition of HMS Health, LLC and HMS Processing, LLC, which are collectively known as HMS. The transaction included a $25 million cash payment and a $2.5 million note that pays a 5% coupon, due October 2022. Also, last month, the company closed its acquisition of GuadCo, LLC and KCR Holdings LLC, collectively named KCR, for $70 million. Although these acquisitions could help the company to expand its existing retail footprint, they could put pressure on its financials given its weak cash flow.
Inadequate Financial Strength
Although TRSSF’s net sales increased 106% year-over-year to $53.4 million in the first quarter ended March 31, 2021, its cash flow from operations declined 28.5% sequentially to $13.3 million. The company’s net loss was $12.7 million, compared to a $10.3 million net loss in the first quarter of 2020. Also, TRSSF’s general and administrative expenses rose 45% year-over-year to $15.8 million over this period.
TRSSF’s trailing-12-month net income and levered free cash flow margins are negative 68.9% and 55.7%, respectively. Also, its trailing-12-month ROA and ROE are negative 19.2% and 93.6%, respectively. Furthermore, the company’s CAPEX/Sales ratio is 28.3%, which is 583.6% higher than the 4.1% industry average.
TRSSF’s 75.24x forward non-GAAP Price/Earnings is 219% higher than the 23.59x industry average. In terms of forward non-GAAP PEG, the company is currently trading at 3.76x, which is 81.6% higher than the 2.07x industry average. Also, the stock’s trailing-12-month Price/Book and Price/Cash flow ratios of 9.27 and 46.58, respectively, compare with the industry averages of 4.07 and 20.16.
Unfavorable POWR Ratings
TRSSF has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TRSSF has a D grade for Quality and Value. This is justified by the stock’s weak profitability and premium valuation.
It has a D grade for Momentum, in sync with the stock’s 11.1% decline over the past three months.
In addition to the grades we’ve highlighted, one can check out additional TRSSF ratings for Sentiment, Growth, and Stability here. The stock is ranked #161 of 227 stocks in the F-rated Medical – Pharmaceuticals industry.
Click here to view the top-rated stocks in the Medical – Pharmaceuticals industry.
Although the company’s key acquisitions in Northeast Pennsylvania and Maryland could expand its cultivation and processing capacity, the fact that it has been bleeding money at a time when its expenses and losses are already high could lead to a further price retreat by its stock. Also, given the industry headwinds, it could be a risky bet. So, we think it is best avoided now.
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TRSSF shares were unchanged in premarket trading Tuesday. Year-to-date, TRSSF has declined -0.20%, versus a 13.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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