Ascend Wellness Is A Buy At A Better Price

seekingalpha05-26

Ascend Wellness reported solid Q1 financials, exceeding revenue and adjusted EBITDA expectations.Analysts have increased their outlook for Ascend's revenue and adjusted EBITDA growth in 2024 and 2025....

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Darren415 Ascend Wellness (OTCQX:AAWH), still up a bit in 2024, is down a lot this month. I wrote it about it at the end of March, suggesting it was cheap then and rating it a Buy. Since then, the company delivered a solid Q1 report and progress has been made on cannabis rescheduling. I still like the stock, down 14.3% since I called it out. It is a large position in my Beat the Global Cannabis Stock Index at 10.0%, and it is nearly maxed-out in my Beat the American Cannabis Operator Index at 24.3%, one of five positions. In this follow-up, I discuss the Q1 financials, share an update of the analyst outlook, look at the chart and assess the current valuation. Ascend Did Very Well in Q1 Analysts had expected Ascend to generate revenue of $140 million with adjusted EBITDA of $30 million when they reported on May 7th. The company actually reported revenue of $142.4 million, up 2% sequentially and 25% from a year earlier. Adjusted EBITDA of $32.5 million was also ahead of expectations and grew 39% from a year earlier. Retail revenue in Q1 grew 15% from a year earlier to $95.2 million. Net wholesale revenue expanded 50% to $47.2 million. The gross margin improved from 31.3% to 36.5%. Expenses lifted by 40%, but the operating profit expanded by a lot to $2.6 million. As much as I like Ascend, its balance sheet concerns me. Net debt ended Q1 at $237.6 million. Its $275 million credit facility matures in August of 2025. The good news on the balance sheet is that its current ratio of 2.2X is much higher than some of the larger MSOs. Negatively, tangible book value was -$131.1 million. Operating cash flow was positive at $3.9 million, but it fell from a year ago. The company guided for full year cash flow from operations to be $55-65 million, which would be down from the $75.3 million in 2023. The Outlook for Ascend Is Better Now Ahead of the report, analysts, according to Sentieo, were looking for 2024 revenue to be $577 million with adjusted EBITDA of $124 million. In its Q1 financials press release, the company guided to revenue growth in 2024 of 12-15% and adjusted EBITDA growth of 17-22%. The analysts have upped their outlook, and they expect revenue will increase 13% to $586 million. They project adjusted EBITDA will increase 20% to $128 million. For 2025, 5 of the 9 analysts covering AAWH were expecting the company to generate revenue of $617 million with adjusted EBITDA of $142 million. Now they expect revenue will increase 6% to $621 million with adjusted EBITDA growing 13% to $144 million, a margin of 23.2%. The words of the new CEO, John Hartmann, were very encouraging, but I think the actions he recently took say more. On April 1, the company revealed that Hartmann bought 192,500 shares. Hartmann was the former President of buybuyBaby and COO of Bed Bath & Beyond from 2020 to 2022. Previously, from 2013-2020, he was the President & Chief Executive Officer at True Value Company. He brought in a new CFO in late 2023 too. Mark Cassebaum was EVP of Finance and Planning at Centri Brands before he joined Ascend. The move towards rescheduling of cannabis is a potential catalyst for Ascend and other MSOs. If Schedule 1 becomes Schedule 3, 280 taxation will end. Adjusted EBITDA won't change, of course, but the lower taxes will boost net income and cash flow. In 2023, despite an operating income loss of $3.6 million, the company paid income tax of $33.5 million. The Ascend Chart Suggests It Is a Good Time to Own It I published that last article, where I introduced a Buy rating, on March 31 (Easter) and based it on the prices as of March 28 when the quarter ended. I am going to look at the quarter-to-date performance of the stock. The New Cannabis Ventures Global Cannabis Stock Index has declined 5.2% in Q2, while the NCV American Cannabis Operator Index has dropped a stunning 13.9%. Ascend is down 14.3%, slightly worse than this index. Ascend is one of the four Tier 2 MSOs. These are all smaller than the Tier 1 MSOs, some of which have dropped even more than Ascend in Q2: YCharts The worst has been Verano Holdings (OTCQX:VRNOF), which I said was no bargain in mid-April. It has dropped 18.7% since then. I don't yet include Green Thumb Industries (OTCQX:GTBIF) in my Beat the GCSI model portfolio, but I did upgrade it from Sell to Neutral earlier this month. I have a Sell on Trulieve (OTCQX:TCNNF), and a Strong Sell on Curaleaf (OTCPK:CURLF) that I reiterated just this past week. The best performance has come from Cresco Labs (OTCQX:CRLBF). The average of the five Tier 1 MSOs has been a return of -17.6% quarter-to-date, which is worse than the decline in Ascend. The sharp pullback in the large MSOs has come since the DEA confirmed that it is seeking to reschedule cannabis from Schedule 1 to Schedule 3. The five Tier 1 names saw very high volume on Friday. Cresco Labs, which fell 10.8% last week, traded 3.34 million shares on Friday, 3.6X its average daily volume over the past month. Curaleaf, which declined 16.3% last week, traded 5.36 million shares Friday. This was 7.0X the average volume over the last month and also an all-time high number of shares. GTI traded 3.69 million shares, 6.4X the daily average and also a record high. That stock dropped 13.2% last week. Trulieve, which fell 14.7% last week, traded 2.22 million shares, which is 4.0X the average. Verano, which dropped 20.8% last week, traded 3.21 million shares on Friday, which is 10.0X the average over the past month. Ascend traded only 179K shares, which was almost 50% below its daily average over the past month. These large trades were executed in the after-hours. For Curaleaf, 5 million shares traded at 4:05 at $4.68, which was the closing price. The GTI trade was 3 million shares at $11.29, also the closing price. Trulieve's trade was also at its closing price of $10.45 and was 2 million shares. Verano's print was 3 million shares at $4.12, the closing price. While the cannabis index rallied on Friday, each of these stocks fell in price. Ascend rallied on Friday, though it did fall 14.6% during the week. Looking at the Ascend chart, the stock is down a lot over the past two years: Schwab While the stock has more than doubled since the late-August all-time low, it has dropped 63.1% over the past two years. This is worse than each of the Tier 1 names, which have dropped 6.6% (Green Thumb) to 50.9% (Cresco Labs). Its performance is second-best among the four Tier 2 names. The chart of Ascend looks promising to me. While most MSOs have struggled to achieve the volume that they experienced in August and September, after the DEA rescheduling rumor hit, Ascend has had higher volumes. The stock qualified for inclusion in the Global Cannabis Stock Index when it was rebalanced at the end of March. Unlike the NASDAQ names, Ascend, as an OTC stock, doesn't face any sort of delisting risk if it falls below $1.00. I see support there. It was the low near the end of December 2022, and it was where the stock ended in 2023. I see resistance at $1.50 and then $2.00. Since bottoming below $0.50 last year, the stock has experienced higher highs and higher lows. Breaking $1.00 would end that. While its share-count has soared, AdvisorShares Pure US Cannabis ETF (MSOS) hasn't upped its small stake in AAWH very much. It is still 1.9 million shares, as I shared in the last article in late March. This is just 0.2% of the entire portfolio, which holds 82% in the five Tier 1 names. Ascend Wellness Is Cheap Outright and to Peers Ascend at $1.11 has a market cap, based on 230.6 million fully-diluted in-the-money shares, of $256 million. Adding in the net debt gives an enterprise value of $494 million. This is currently just 3.8X the 2024 projected adjusted EBITDA, a very low ratio. In fact, the 3.9X is the lowest of all of the Tier2 companies. The five Tier 1 names have an average enterprise value to projected adjusted EBITDA for 2024 of 7.7X. For targeting a year-end price, I use the 2025 projected adjusted EBITDA. My target for Ascend is very low at just 8X. This works out to $3.97, which is 257% higher than the current price. Of course, there is substantial risk in Ascend too. For instance, if rescheduling doesn't happen, then 280E taxes will still be owed. The net debt is high and could be hard to roll over too. Still, the stock trades very cheaply to its peers, and they face this same risk. I would like to think that M&A could happen, but the failure of the Cresco Labs acquisition of Cannabist suggests the challenges there. The good thing for Ascend is that it operates in just a few states. It is at the maximum number of stores in Illinois. In Michigan, there are no restrictions. Massachusetts limits the number of stores and the size of the cultivation facility. Ohio has some limitations too. New Jersey is capped at 3 stores, which Ascend has, and Pennsylvania, where the company operates three stores, limits the number of stores too. Finally, Maryland, where it operates four stores, limits operators to four dispensaries. For a large MSO to buy Ascend, they wouldn't be able to if they had stores in Illinois. This rules out most. There are some other limitations too. Is there a large MSO that is not in Illinois, Massachusetts and New Jersey? Yes! Does it trade at a higher valuation? Yes! I wouldn't count on Trulieve to buy Ascend, but it could. Conclusion I like Ascend Wellness a lot, and I have boosted my positions in both model portfolios recently. The stock seems cheap to its peers, and the company seems to be performing well. The analysts are hiking their outlooks, but the stock has declined. I have pointed to the challenge of the balance sheet. For investors looking to capitalize on cannabis being rescheduled, I think that Ascend could do very well. The CEO has transitioned to the industry and his new position over the past year, and his buy of the stock reinforces my enthusiasm.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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