U.S. multi-state operator TerrAscend (TRSSF 4.57%) fell on Tuesday following its fourth-quarter earnings report. The fall wasn't so much about what was in the report, but rather news that its CEO and chairman Jason Ackerman was stepping down from his roles. An overall market decline didn't help, either.
However, savvy investors may wish to put TerrAscend on their radar, as its fourth-quarter results and guidance were anything but worrisome. In fact, its business is positively booming.
Image source: Getty Images.
Why Ackerman stepped down
You may be wondering why, if the company was performing rather well, its CEO resigned. New chairman Jason Wild said in the press release: "Unfortunately, there were differences in philosophy over management style and culture, and the Board and I decided it is in the best interest of the Company for us to part ways. We wish him the best in all his future endeavors."
On the conference call, Wild reiterated that Ackerman's departure was really more qualitative than anything having to do with performance. Ackerman had also only been chairman for about a year and CEO for less than a year, so he was relatively new to the company anyway. Meanwhile, Wild expressed high confidence in the interim leadership team, consisting of CFO Keith Stauffer, Chief Legal Officer Jason Marks, and Greg Rochlin, the head of Ilera Healthcare (acquired by TerrAscend), who runs the company's northeast operations.
Business is booming
It's a good thing Rochlin is stepping into a leadership role as the company searches for its next CEO, since the company's northeast operations, which he runs, are booming. TerrAscend is the leading cultivator and processor in Pennsylvania and has vertically integrated operations in San Francisco, manufacturing in Canada, and an emerging presence in New Jersey.
Both the Canadian and California operations actually struggled last year. Though the company doesn't break out these segments separately, management did note that the California dispensaries had been heavily affected by the COVID-19 pandemic. Most of TerrAscend's California dispensaries are in the middle of downtown San Francisco, and thus suffered a bit as people worked from home and tourism was effectively shut down. Meanwhile, Canada has had well-known problems with oversupply in a relatively lower-growth market.
Despite this, TerrAscend posted stellar results in the fourth quarter. Revenue surged 152% year over year to 65.3 million Canadian dollars ($52 million), while gross margin improved to 60% and adjusted EBITDA margin improved to 40%. That margin profile is remarkably high, and among the best in the industry.
TerrAscend's New Jersey cultivation facility is ramping up in 2021. Image source: Getty Images.
And more to come
TerrAscend expects things to improve in 2021, forecasting revenue to grow at least 84% in 2021 to $290 million, with EBITDA margin increasing to 42% and $122 million or more in adjusted profits.
Not only will TerrAscend continue to benefit from its No. 1 position in manufacturing and cultivation in Pennsylvania, which is currently suffering from supply not being able to meet demand, but also from the ramp up of New Jersey operations, which is just beginning in earnest.
In New Jersey, the company is expanding a 40,000-square-foot greenhouse and 80,000 square foot indoor manufacturing facility, and plans to increase its dispensary count from one to three by the third quarter of 2021. And TerrAscend's California operations should benefit from economic reopening this year, as people and tourists return to downtown. The company just completed a recent 500% expansion of its super-premium craft flower cultivation facility in the state, and just opened two new dispensaries in Berkeley and Capitola, so it's poised to capitalize on increased traffic.
Finally, TerrAscend is also looking to enter the Maryland market, agreeing to buy cultivator and processor HMS Processing in November 2020, though that deal has yet to close.
Going forward
With a presence in Pennsylvania, New Jersey, and Maryland, TerrAscend would have highly efficient operations in adjacent northeastern states if legalization happens and interstate commerce for cannabis becomes allowed.
Accounting for all stock warrants, earn-out payments, and potential acquisitions in its share count, TerrAscend has a market cap around $3.35 billion, or about 27 times its 2021 EBITDA. That's not exactly cheap, but for a company growing 80%-plus with increasing profit margins, it's not a terrible price, either.
The big factor will be whether U.S. cannabis companies will get some regulatory relief, perhaps from the SAFE banking act making its way through Congress, or the much-hoped-for repeal of high taxes brought on by Section 280E of the Internal Revenue Code. If that happens, it would be a boon for all U.S. cannabis players, and TerrAscend is as well run as any of them -- despite the turnover at the top.
