Cresco Labs Inc (CRLBF)

[FUNMAN]

Cresco Labs: Boosting Its Presence On The West Coast

Oct. 2, 2019
9:52 PM ET

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Summary

* Cresco Labs announced a $283 million purchase of private cannabis operator Tryke, which operates in Arizona and Nevada.

* Tryke's crown jewel is its Reef Dispensary located near the Las Vegas Strip - one of the only two cannabis retailers in that vicinity.

* We think the deal is a great for Cresco given 1) attractive purchase price, 2) strong profitability, and 3) good fit and minimal overlap.


Cresco Labs (OTCQX:CRLBF) just announced a big acquisition when it bought Tryke Companies for $283 million. The deal expanded Cresco Labs into two of the most valuable cannabis markets in the U.S. and will boost its revenue and EBITDA significantly. We liked the deal and believe that Cresco Labs is shaping up to become one of the most promising MSOs in the U.S. due to its focus on brands, scale, and wholesale distribution. We continue to be bullish on the stock and view recent share price weakness as buying opportunities.


Arizona + Nevada

Tryke operates 6 dispensaries and supporting cultivation and processing facilities in Arizona and Nevada. It also won a license in Utah from one of the 8 licenses that were awarded. Tryke's crown jewel is its Reef Dispensary located near the Las Vegas Strip. It is one of the only two stores near the Strip, the other one being Planet 13 Holdings (OTCQB:PLNHF) with its Superstore.



Nevada is Tryke's key market, as it operates 4 locations under the Reef Dispensaries brand. The company claims to have a top 3 market share in Nevada. Most notable is its store adjacent to the Las Vegas Strip. Tryke's store is one of the two only locations close to the Strip, along with Planet 13. The Superstore owned by Planet 13 recently announced that its July 2019 sales reached $5.4 million for annualized sales of $65 million. Clearly, the tourists visiting Las Vegas is a powerful source of revenue for both dispensaries.


Tryke also operates two dispensaries in the state of Nevada, which adds to the single location that Cresco Labs operates. We think Arizona is one of the most attractive medical cannabis markets in the country due to its large, densely populated elder population, which is similar to Florida. Many companies have been scooping up assets in Nevada at a fast pace recently, including Curaleaf Holdings (OTCPK:CURLF) and Harvest Health & Recreation (OTCQX:HRVSF). We think this deal is a valuable addition to Cresco Labs' footprint and will accelerate its expansion.



Why This Is A Good Deal

We think the acquisition of Tryke is a good deal for two reasons. First of all, the deal makes financial sense due to the mature earnings profile of the assets being acquired. Tryke generated $70 million in sales and $25 million in EBITDA during fiscal 2018 for a margin of 36%. Meanwhile, Cresco Labs reported total revenue of $30 million in 2019 Q2, and EBITDA was a mere $2.3 million. Clearly, Tryke has achieved great financial success and its operations are much more mature and profitable than Cresco Labs, making the acquisition an attractive move from a pro forma financial point of view.


On the valuation front, the total purchase price also included real estate assets of $30 million. Because most of the cannabis acquisitions included real estate assets, we should not exclude them for comparison purposes. Cresco Labs paid a total of $283 million for Tryke with 2018 revenue of $70 million and EBITDA of $25 million. The purchase multiples of ~4x EV/Sales and ~11x EV/EBITDA are much lower than Cresco Labs' own trading multiple of 19x EV/Sales and 242x EV/EBITDA. Put another way, this deal is immediately accretive to Cresco Labs from a valuation multiples point of view. It is also worth mentioning that Planet 13 trades at a market cap of ~$260 million and 3.8x EV/Sales, and it relies predominantly on its Las Vegas store for most of its sales.


The acquisition also makes strategic sense for Cresco Labs, as its current presence is concentrated in Florida, Illinois, New York, Pennsylvania, and California, which will come from its acquisition of Origin House. Arizona and Nevada were two weak points in its footprint, and we think it would be tough to acquire or build assets to the same level of success as Tryke. These two states are adjacent to California, which will be a core focus for Cresco after its acquisition of Origin House closes. Furthermore, potential legalization of adult consumption in Arizona could provide further tailwinds for this market. Lastly, the acquisition has minimal overlap with Cresco's existing operations, which will make regulatory approvals easier to obtain.


Looking Ahead

We believe the acquisition of Tryke by Cresco Labs is a sound decision and demonstrates management's ability to identify and secure attractive assets in a competitive M&A market. The transaction price is reasonable, and the deal would help boost Cresco's revenue and improve its EBITDA margin immediately. The minimal overlap of footprints between the two companies makes the deal all that more attractive, and it helps to strengthen Cresco's presence in two very important cannabis markets in the U.S. Despite recent share price weakness, we think Cresco Labs is one of the best-positioned MSOs due to its focus on brand and wholesale distribution. Its past acquisitions have focused on acquiring top-selling brands and establishing distribution networks within key markets such as California. The biggest near-term catalyst would be the successful closing of its Origin House acquisition.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.