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With only a few other companies to release numbers before the end of the Q2 reporting period, it is very clear that the American cannabis industry is making tremendous strides with good prospects. While most cannabis stocks have fallen in the past two weeks, we believe the reasons have little to do with reports so far. Here are our insights from what we saw and heard.
Falling demand did not affect results
One of our concerns at the start of the reporting season was that the recently released data showing a slowdown in cannabis sales in many state markets would weigh on results for MSOs, but this was nowhere near the case. We remind readers that sales growth is only partially dependent on the growth of the overall market. MSOs grow by expanding within existing operating markets through adding capacity and new branches and into new markets and through consolidation. While any type of market slowdown is likely to be short-lived as we go over the comparisons to the extremely robust sales last summer a year ago, we had concerns that if there were lost sales due to the slowdown, investors would react negatively .
Cannabis companies learn the value of conservatism with guidance
Most MSOs and subsidiary companies exceeded expectations, reflecting a better-than-expected near-term environment, but very few were willing to raise their year-end outlook. We believe this failure to raise the forecast is likely one of the biggest negative aspects of the reporting season. Often times, when a company exceeds expectations but retains its prospects, it has seen a shift in revenue from later periods. However, this is not the case here. Some companies just sounded conservative when they were being pushed by analysts, which makes sense to us for a number of reasons. First, there is no reason to be aggressive with prices, which are already generally lower than a quarter of a year ago. Second, and more importantly, there are a few factors that need to be exercised with caution, including the slower-than-expected flower distribution in New York and the final New Jersey rules and construction delays. Another factor is the uncertainty about how the delta variant could affect operations.
State program expansions are progressing safely but slowly
Those who have watched the development of the cannabis industry know how slow rollouts are the norm, and there has been much discussion in the conference calls about when the first adult sales will be in New Jersey and New York. In the case of the latter, most companies now assume that these first legal sales will not take place until 2023. Another important issue in New York is when to allow flower sales under the existing medical program. Finally, when Illinois was only recently issuing additional pharmacy licenses, analysts asked how operators in that market feel about when these stores will open. These programs will drive tremendous growth in the future, but the slight shift in the timing of initial sales may be negative in the short term.
Debt costs are falling
Several companies pointed to falling debt costs on their conference calls, and Cresco Labs announced a new facility that increased the amount of debt, lowered the interest rate (9.5% excluding warrants) and extended the term to 5 years. With the expansion of new markets ahead, access to capital will be very important. The availability of outside capital at more attractive conditions is a positive dynamic.
M&A remains the top priority
At the beginning of the year, we shared our view that mergers and acquisitions were going to be a big story in 2021, and it certainly is. Based on the conference calls we’ve heard, we continue to expect further consolidation from the leading MSOs. Again, we assume that most of these transactions will involve the acquisition of private operators in a state.
Despite the negative reaction of most stocks to the earnings reports, we don’t believe the reports caused the sale in most cases. The cannabis sector continues to suffer from the technical momentum of stock overruns at the start of the year. Financial reports were generally good, but there was nothing that would necessarily attract new buyers and it seems like some investors and traders are pulling the plug on positions that have now been in decline for over six months. We remain encouraged by the underlying fundamentals and expect the sector to benefit from the surge in new markets opening up to adults over the coming years.
Ayr Wellness is an expanding, vertically integrated American MSO that operates on the belief that everything starts with the quality of the facility. The company reported strong second quarter revenue of $ 90 million and raised its guidance for full year 2022 to $ 800 million. Ayr recently announced entry into Illinois as the 8th operating state and planned acquisition of cannabis-infused beverage brand Levia.
Find out about the Ayr Wellness Investor Dashboard, which we maintain on your behalf as a customer of New Cannabis Ventures. Click the blue Follow Company button to stay updated on the progress.
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Alan & Joel
Alan is based in Houston and leverages his experience as the founder of the online community 420 Investor, the first and still largest due diligence platform focused on publicly traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and enable its sustainable growth. At New Cannabis Ventures he is responsible for content development and strategic alliances. Before Alan, who started his career on Wall Street in 1986, switched his focus to the cannabis industry, he worked as an independent research analyst after over two decades in research and portfolio management. A prolific writer with over 650 articles published on Seeking Alpha since 2007, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source for the media including the NY Times, the Wall Street Journal, Fox Business , and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | E-mail
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In this article:
4Front, auxly, ayr, ayr wellness, AYRWF, cbwtf, ffnt, ffntf, glas.au, glasf, Glass House, glass house brands, gnln, gram, GRAMF, greenlane, Hexo, hexo corp, Lowell Farms, LOWL, LOWLF, marimed, MedMen, mmen, mmnff, mrmd, newlake, schwazze, Scotts Miracle-Gro, SHWZ, smg, TER, Terrascend, The Parent Company, Tilray, TLRY, TPCO Holding, TRSSF, VFF, Village Farms, xly