Cresco Labs: This Cannabis Company Deserves Investors' Attention
May 23, 2021 10:30 AM ET
Cresco Labs Inc. (CRLBF) https://seekingalpha.com/article/4430710-cresco-labs-cannabis-deserves-investor-attention
Cresco Labs’ leading position as a wholesaler of branded cannabis products and its growing retail presence via its Sunnyside brand make it an attractive cannabis play.
The company’s inorganic growth strategy, including the recent acquisition of Bluma Wellness, is helping in establishing its footprint in key US cannabis markets.
Cresco Labs is trading at an attractive valuation compared to other multi-state operators and is a compelling “buy” given the rising demand for cannabis.
Cresco Labs (OTCQX:CRLBF) is one of the leading vertically integrated, multi-state cannabis operators in the US, with its branded products being sold in more than 1,100 dispensaries across the country. After delivering splendid growth rates last year, Cresco is poised to further boost its sales over the coming years thanks to continued expansion and strategic acquisitions like Origin House in 2020 and Bluma Wellness this year. Also, the company is well placed to capture additional growth opportunities with more and more US states legalizing cannabis.
Source: Seeking Alpha
Cresco Labs stock has rallied 147.3% over the past 52 weeks, outpacing the 42.2% rise in the S&P 500 Index. However, the stock has declined 29% over the past three months and is trading at an attractive valuation compared to its US peers. In my opinion, investors looking for exposure to the cannabis sector should consider adding Cresco Labs to their portfolio based on the company’s growth potential.
Growing at an impressive rate
Robust demand for cannabis, cultivation expansion in Illinois and Pennsylvania and the Origin House acquisition drove an impressive 271% growth in Cresco Labs’ revenue in 2020 to $476.3 million. Adjusted EBITDA (net of the impact of biological assets) came in at $116 million in 2020, reflecting a massive jump compared to $8 million in 2019. Adjusted EBITDA margin expanded to 24.4% from 6.2% in 2019 with operational gross margin improving to 51.5% from 48.2% in 2019.
Cresco is expanding into additional markets with a focus on its wholesale-first strategy. The company’s wholesale business accounted for 58% of its overall revenue in 2020. Cresco’s strong portfolio of brands like Cresco, High Supply, Remedi, Mindy’s, Reserve, Good News, Wonder Wellness and FloraCal Farms, is helping in winning customers at a rapid pace. In the fourth-quarter conference call, the company mentioned that as per BDSA, the Cresco brand was the number one cannabis brand sold in the country in the quarter and some other brands like High Supply featured among the fastest-growing brands.
Source: Cresco Labs’ Investor Presentation
Looking ahead, Cresco’s wholesale business is expected to benefit from its cultivation and manufacturing expansion projects in Massachusetts, Ohio, and Michigan, entry into additional states as well as from recent acquisitions. The company is mainly focusing on strategic markets offering both favorable regulations and large populations that could drive strong demand. Cresco is well-placed to expand in states like New York, which have recently legalized recreational cannabis. It is one of the ten operators licensed for vertical operations in New York.
Coming to inorganic growth, the company’s recently completed Bluma Wellness acquisition has helped it in entering the lucrative Florida market via Bluma’s cultivation facilities and dispensaries in the state. Following the Bluma acquisition, Cresco has operations in 10 US states with 18 production facilities.
In February 2021, Cresco acquired Verdant Creations’ four dispensaries in Ohio, bringing the company’s total dispensary count in Ohio to five, which is the maximum retail license permitted by the state. In March, the company announced the proposed acquisition of Cultivate Licensing. Cresco believes that the Cultivate deal would place it among the top three players in Massachusetts, the largest adult-use cannabis market in the Northeast region.
Meanwhile, Cresco’s retail presence through its Sunnyside dispensaries is also driving its revenue growth. The company’s retail revenue surged 316% to $202 million in 2020 and accounted for 42% of the overall revenue. Also, Cresco’s average revenue per store in the fourth quarter of 2020 (for 19 stores open during the quarter) came in at $3.6 million, which as per the company was the highest among tier-one MSOs (multi-state operators). Following the Bluma Wellness acquisition, Cresco now operates 32 owned dispensaries.
Cresco is scheduled to report its first-quarter results on May 27 and as per TIKR.com, analysts expect the company to post revenue of $170.67 million, reflecting year-over-year growth of 157%. They predict an adjusted EBITDA of $46.73 million in the first quarter of 2021, which implies a significant growth compared to $3.17 million in the first quarter of 2020.
Overall, Wall Street analysts expect Cresco’s revenue to grow 72.6% to $822.1 million in 2021 and adjusted EBITDA to grow 112.6% to $246.70 million. Furthermore, analysts anticipate Cresco Labs to post a net income of $77.71 million in 2021 compared to a net loss of $81.93 million in 2020.
Risks to be considered
Cresco has been aggressively making acquisitions to fuel its expansion. The costs related to these acquisitions and any adverse issues associated with the integration of the acquired businesses or potential delays could be a drag on the company’s performance. Also, continued investments in expansion in existing markets, entry into new ones as well as rising competition could weigh on the company’s margins.
Plus, investors need to be aware that stocks in the cannabis sector are volatile and any adverse news related to regulations, cannabis products and lower-than-anticipated growth rates could significantly impact the stocks in this sector.
As per TIKR.com, analysts’ price targets for Cresco stock range from $15 to $21.50. The average price target of $17.50 implies an upside potential of about 56% from current levels. Coming to valuation, Cresco Labs is trading at a forward Price-to-Sales (P/S) multiple of 5.48, which is lower than the sector average of 7.65. In comparison, US multi-state cannabis operators Curaleaf (OTCPK:CURLF), Trulieve (OTCQX:TCNNF) and Green Thumb (OTCQX:GTBIF) are trading at forward P/S multiple of 9.25, 6.83 and 8.37, respectively (valuation data as of May 20, Source: Seeking Alpha).
BDSA estimates US legal cannabis sales to grow to $41.3 billion in 2026 from over $17.5 billion in 2020, implying a CAGR of 15%. Cresco is well-positioned to capture the massive opportunities in the cannabis market through organic growth and strategic acquisitions. In my opinion, Cresco is an attractive cannabis pick based on its strong positioning in the wholesale cannabis space, presence in key markets like Illinois, Pennsylvania and California, as well as the potential to grow at a rapid pace with additional US states legalizing medical and recreational marijuana.
This article was written by
I am an MBA Finance with more than a decade of experience as a research analyst. I am passionate about anal...
Long/Short Equity, Retail, Tech, Healthcare
Contributor Since 2013
I am an MBA Finance with more than a decade of experience as a research analyst. I am passionate about analyzing stocks across various sectors and explore long-term investment opportunities.
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.