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With only a few other companies releasing numbers before the end of the second quarter financial reporting period, it’s very clear that the U.S. cannabis industry is making huge strides with good prospects. While the prices of most cannabis stocks have fallen over the past two weeks, we believe the reasons have little to do with what has been reported so far. Here are our takeaways from what we’ve seen and heard.
Softening demand had no impact on results
One of our fears as earnings season approached was that recently released data showing a slowdown in cannabis sales in many state markets would weigh on MSO results, but it was far from over. be the case. We remind readers that revenue growth is only partially dependent on the growth of the overall market. MSOs grow through expansion into existing operating markets by adding capacity and new stores and into new markets as well as through consolidation. While any sort of market downturn is likely to be short-lived as we run through comparisons with the extremely robust summer sales a year ago, we were concerned that investors would react negatively if there was. had sales declines due to slower demand.
Cannabis companies learn the value of being conservative with advice
Most MSOs and ancillary companies exceeded expectations, reflecting a better than expected near-term environment, but very few were willing to raise their outlook for the remainder of the year. We believe this failure to raise expectations is probably one of the biggest perceived negatives of the earnings season. Often times, when a business exceeds expectations but maintains its outlook, it sees a lag in revenue from later periods. This is not the case here, however. Several companies, pushed by analysts, appeared to be simply conservative, which makes sense to us for several reasons. First, with prices already generally lower than a quarter ago, there is no need to be aggressive. Second, and more importantly, there are factors that suggest caution, including the slower-than-expected deployment of flowers in New York and getting final rules for New Jersey along with construction delays. Another factor is the uncertainty about the impact of the delta variant on operations.
State program expansions are proceeding surely but slowly
Those who have followed the development of the cannabis industry understand how slow deployments are the norm, and there has been a lot of talk on conference calls regarding the timing of the first adult sales in New Jersey and New York. . On this last point, most companies now believe that these first legal sales will not take place until 2023. Another big issue in New York is when flower sales are allowed under the existing medical program. Finally, with Illinois recently granting additional dispensary licenses, analysts asked how operators in that market were thinking when the stores opened. These programs will fuel huge growth going forward, but the slight shift in the timing of first sales may be a negative in the short term.
Debt costs are falling
Several companies highlighted the drop in debt costs during their conference calls, and Cresco Labs unveiled a new facility that increased the amount of debt, lowered the interest rate (9.5% without a warrant) and extended the duration to 5 years. Given the upcoming developments for new markets, access to capital will be very important. The availability of debt on more attractive terms is a positive dynamic.
Mergers and acquisitions remain a priority
At the start of the year, we shared our view that mergers and acquisitions would be a big story in 2021, and it certainly has been. Based on the conference calls we have heard, we still expect continued consolidation of major MSOs. Again, we expect most of these deals to be the acquisition of private operators from a single state.
Despite the negative reaction from most stocks to earnings reports, we don’t believe the reports, in most cases, were the cause of the sell-off. The cannabis sector continues to suffer from the technical dynamics of inventory overreactions at the start of the year. Financial reports were generally good, but there was nothing that would necessarily attract new buyers, and it appears that some investors and traders are closing positions that have now been down for more than six months. We remain encouraged by the underlying fundamentals and expect the sector to capitalize for years to come on the proliferation of new markets opening up to adult use.
Ayr Wellness is a growing, vertically integrated American MSO, operating on the belief that it all starts with the quality of the plant. The company posted strong second quarter revenue of $ 90 million and raised its guidance for the year 2022 to $ 800 million. Ayr recently announced its entry into Illinois as the 8th state of operations and plans to acquire the cannabis-infused drink brand, Levia.
Update yourself by visiting the Ayr Wellness Investor dashboard which we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button to stay updated on their progress.
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Alain and Joël