TerrAscend TRSSF reported its financial numbers and there were impressive statistics within. But, what is going to be more impressive will be the future of the company. Future revenue projections are very high. Over the past year, TerrAscend has been scaling up operations and its retailers in several states. Revenue growth is expected to increase to $300M over the next four quarters, up from $150M. Plus, with very attractive margins and cost metrics, there is a substantial profit opportunity. All the while, the stock is generally undervalued to future opportunities.
TerrAscend TRSSF Stock Chart
To start, here is a look at the current stock chart:
Here you can see TRSSF has been moving higher over the course of the past few months but has eased off of recent highs along with most other cannabis stocks.
TerrAscend TRSSF Stock Financial Data
Revenue
TerrAscend operates in multiple locations: Pennsylvania, New Jersey, Massachusetts, Maryland, California, and in locations in Canada. Here is the revenue from the latest release:
As the CEO pointed out, TerrAscend’s dry product is #1 in Ontario, the largest cannabis market in Canada. You get to #1 in the largest market because you have the best product. And, because you have the best product you have a high retention rate for the product.
Cannabis is booming in Canada with a 130% YoY growth rate. With the #1 product in the biggest market, this will play out handsomely for revenue growth. This, after TerrAscend had gone through a restructuring period. So, the success of its brand is distinctive.
The best part of this is that management has guided us to hit $300M in the next four quarters. I’m converting that to a slightly higher amount over the course of the next year. This is a significant increase from where they are now. (NOTE: Future guidance is stated in USD as reporting will now begin being reported in USD).
I will add future projections below.
Gross Margins
Here is a look at gross margins for TerrAscend:
TerrAscend is a vertical company going from seed to store. Also, they sell their products throughout other dispensaries. They have solid brand awareness.
Gross Margins are slightly on the lower end for a solid company performance. Normally, I see between 60% and 65% gross margins for the top companies. There is room for improvement with this. That will occur with the increased revenue numbers and economies-of-scale. The extra 5% will add to the gross profits some additional C$15M for the year.
TerrAscend Operating Efficiencies
Operating costs are costs associated with running the business versus input costs for manufacturing the products. This metric is mathematically derived by total operating costs over total revenues. It shows the efficiency of the company to manage the production of the product and get it to market versus total revenue.
Since it is a mathematical percentage, and it is cost versus sales, you want the lowest possible cost you can get. The top-performing companies have efficiencies coming in about 30% – 35%. TerrAscend is coming in at top-level efficiency.
Also, this is a mathematical equation, as mentioned. Some costs will remain the same regardless of the number of goods sold, such as the rent on a building for a dispensary or facility. But, other input costs, such as SG&A, will move upwards as more products are sold. These are marginal costs.
With the increased revenues that TerrAscend will print and the fact that their cost metrics are already low, this will drive the cost efficiency number much lower. I would not be surprised to see TerrAscend print below the 30% level.
Future projections for TerrAscend
Management has guided us to ~$300M over the next year. This pushes the average quarterly to about $75M. This is very doable seeing that they just printed $52M and the fact that there multiple locations coming online this year.
Here is what the possible projection can look like:
Keep in mind the projections for TerrAscend future revenues are ~$300M. This projection came from management. I pushed for an initial large increase then small, 7.5% incremental increases thereafter on a QoQ basis.
Remember, several dispensaries are coming online over the next 1 – 3 quarters which will be the catalyst for this driving increase in revenues. At the same time, TerrAscend products are ranked very high which will continually drive revenues from returning consumers.
In fact, I think the $300M will be surpassed given the current environment. That will be an additional opportunity.
TerrAscend Margins & Costs
Here is a breakdown of the company’s finances and how that affects TRSSF:
- 65% gross margins on $300M, that prints $195M in gross profits;
- 30% Operating costs on $300M is $90M for $105M in operating profits;
- 10% on continuing costs for $30M;
- Net profits of $75M
- TRSSF have 77M & 172M outstanding shares
- $0.48 EPS over the next four quarters
With an earnings multiple of 100x, this pushes TRSSF up to $48.00 per share over the course of the next year.
I usually use about a 100x multiple. The S&P 500 is trading at about 35x future earnings. They have an average of 3.5% revenue increase YoY. TerrAscend just printed a 29% QoQ. This blows out the 35x future multiple. Even at 50x, a very modest future earnings multiple, TRSSF moves upwards very significantly.
Equities Don’t Move Straight Up
There has been some selling in MSOs the past few sessions. I see this as an opportunity to purchase stocks on the cheap. A lot of companies are overvalued relative to what their potential is. But, because they have name-brand recognition that ordinary investors have heard of, these are go-to stocks for average investors to get into.
So, any selling that is happening with the overall cannabis sector should be met with buying. I see TerrAscend as a strong buy because of its future potential and its undervalued price.
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