Ascend Wellness Is A Fantastic Opportunity For Cannabis Investors

I last wrote about Ascend Wellness (OTCQX:AAWH) more than a month ago, calling it a buy at what was a better price. Things have gotten better, but the price is actually lower today than then. Last week, the company got some excellent news, and we are getting very close to cannabis rescheduling potentially. I think that AAWH is dirt-cheap, and I am raising it to a Strong Buy.

Ascend’s Outlook Has Improved

As I wrote in late May, Ascend had a strong Q1. Revenue increased 25%, and adjusted EBITDA grew 39%. Cash flow from operations was $3.9 million, hurt by a build in inventory.

In the last piece in late May, I shared 2024 and 2025 outlooks using Sentieo. I am now using AlphaSense, which acquired the company, and it doesn’t use all of the analysts. I am able to look at the historical AlphaSense estimates, and the outlook has been improving.

For 2024, a single analyst is projecting that revenue will expand 13% to $588.3 million. The adjusted EBITDA is expected to increase 18% to $126.4 million, a margin of 21.5%. In its Q1 press release, the company guided to revenue growth of 12-15% in 2024 with adjusted EBITDA growth of 17-22%. It also guided to cash flow from operations for the year of $55-65 million. In its 10-Q, it projected additional capital expenditures of $35-40 million during the year. Assuming the low end on cash flow from operations and adding $40 million to the Q1 expenditure, the company will generate positive free cash flow of $8 million.

For 2025, revenue is expected to increase 8% to $636.4 million, with adjusted EBITDA gaining 25% to $156.8 million, a margin of 24.6%. That estimate is above the estimate of Andrew Semple of Ventum Capital Markets (PI Financial and Echelon Wealth), who called the stock a top pick in a research report shared on 7/16. Semple projects 2025 adjusted EBITDA of $140.6 million. Both of the AlphaSense estimates are unchanged since mid-May, but are higher than ahead of the Q1 report.

For Q2, the company is scheduled to report its financials on 8/5. The analyst that AlphaSense tracks expects revenue to increase to a record $148 million, up 25% from a year ago, with adjusted EBITDA projected at $30 million. This is strong growth relative to peers.

Ascend Extends Its Debt Due in 2025

In that last write-up, I discussed the balance sheet, suggesting that its $275 million credit facility was set to mature in August 2025. On the conference call, the CEO suggested that the company would address this before it would become a current liability, and it did. Here is what was stated on the conference call:

In regards to refinancing, we’ve had very constructive conversations on our term loan that is due in Q3 of 2025. Over the past few months, we’ve actively sought feedback from both existing and potential new lenders receiving several indications of interest. We have carefully balanced the need to address this debt promptly with the potential for a more favorable environment in the future. Our working plan is to have the refinancing completed before it becomes current.

On Monday, it announced that the company had lined up lenders, and it closed the deal on Thursday. The 12.75% coupon wasn’t so great. It also wasn’t so great that the $235 million of debt was sold at a discount. What was great, though, was the maturity of 2029.

280E Is Likely to Go Away

On April 30th, cannabis stocks soared on the news that the DEA is planning to reschedule cannabis from Schedule 1 to Schedule 3. This not only makes a lot of sense, it makes cents too. The American cannabis companies have long been responsible for paying a huge tax that was implemented by President Reagan decades ago. Those who sell Schedule 1 or Schedule 2 drugs are responsible for paying tax essentially on gross profit rather than net profit. This wipes out business expenses. The American cannabis operators tend to have debt, and these taxes eat up cash flow. It has been a big challenge to the industry.

The DEA put in place a comment period that ends on 7/22. It is very likely that cannabis will be rescheduled and that 280E will go away, but it’s not a done deal. President Trump never supported cannabis, and he actually put Jeff Sessions in as the Attorney General, which was problematic. It’s not clear how Trump will treat cannabis if he is elected in November, but this is a potential risk to rescheduling not taking place or being reversed later.

Ascend has negative tangible equity, and, while its debt has been extended through the end of the term for the next president, it still has debt. 280E going away would be very positive for the company.

AAWH Is Very Inexpensive

Ascend has a market cap of $210 million. Adding in the net debt as of 03/31, the enterprise value is $448 million. This is only 3.6X the projected adjusted EBITDA for 2024, which is very low absolutely and relative to peers.

For targeting purposes, I use the 2025 outlook for predicting a year-end price, and Ascend is the cheapest of the Tier 1 and Tier 2 names currently:

In the piece that I shared in late May, my target was $3.97 based on a multiple of 8X for the enterprise value to projected adjusted EBITDA for 2025. I am lowering it now to just 6X, which seems very low. This helps reduce the risk that the projection is too high, though it makes sense to me. Using 6X, my target is $3.05, which is up 234%.

The Ascend Chart Is Highly Attractive

Almost a year ago, AAWH set an all-time low under $0.50, so it is up a lot since then. It is also down a lot since its recent peak in February:

I see support at $0.80 and below. I see some resistance at $1.00, $1.20 and $1.50, though these levels are far below my target price. The stock ended 2023 at $1.00.

Ascend, down 8.7% so far, has underperformed most MSOs in 2024. The New Cannabis Ventures American Cannabis Operator Index has dropped 1.8%. There is one Tier 2 name that is up, Ayr Wellness (OTCQX:AYRWF), and the other two are down. TerrAscend (OTCQX:TSNDF) has dropped 21.5%, and Cannabist (OTCQX:CBSTF) has dropped 54.1%. The Tier 1 names have generally done better:

Looking at the action since 8/29, the day before the potential rescheduling news hit the market, all of the Tier 1 names have rallied more than 42%, but the Tier 2 names have been mixed:

While AAWH has rallied a lot since late August, it is up less than AYR Wellness and most of the Tier 1 names despite the good news on extending its debt. Perhaps a better look is the past three years, and AAWH has dropped 91.1%.

So, the stock is down but looks like it is bottoming. The big rally from the all-time low is due to the potential of 280E to go away and solid operating results. This week’s continuation of the bounce that began almost a year ago makes sense to me.

Conclusion

While I am saddened by how poorly Ascend has performed in 2024, I am happy to be able to raise it from Buy to Strong Buy today. I have also been pleased to have been able to boost it in my Beat the Global Cannabis Stock Index model portfolio that I share with my investing group. After the news came out Monday, I was surprised that the stock didn’t rally, and I added a significant number of shares to the model portfolio, which currently has an 18% weight. AAWH is not in the index.

For readers, I consider this a fantastic growth investment idea. A year ago, I shared a value idea that ended up working fabulously on Organigram (OGI), which I still include in my model portfolio and hold at a high weight of 20%. Ascend offers significant upside potential, though it along with other cannabis stocks face a risk of rescheduling not taking place.

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