We have been bullish on Cresco Labs for a long time. Our enthusiasm is not waning. There is a lot of positivity in Cresco's new numbers. The stock is lightly covered by media and given short shrift, while sentiment among analysts and bloggers is very bullish. Debt is a negligible risk. Price targets over the next 12 months point to a 160% upside.
We have been bullish on Cresco Labs Inc (OTCQX:CRLBF) for a long time. Our enthusiasm is not waning. There is a lot of positivity in the industry and Cresco's new numbers. (See all our articles about Cresco Labs on Seeking Alpha.)
The Numbers Keep Getting Better
The November 11 '21 announcement of Q3 financials reaffirms our position. CRLBF is a healthy investment for retail value investors. The reported revenue of $215.5M is +2.6% quarter-over-quarter and 40.6% year-over-year.
Gross profit with exclusions stands at $116.7M, 54.2% of revenue, which is +9.0% quarter-over-quarter and +48.3% year-over-year.
The adjusted EBITDA of $56.4M is +24.0% quarter-over-quarter.
Cresco collected record net wholesale revenue of $109.3M.
Its record retail revenue of $106.2M came from 37 stores.
Management expects gross profit margins to be higher than 50% through FY '21.
Q4 revenue will be between $235M and $245M.
Management expects the adjusted EBITDA to be at least 30% in the close of 2021.
Despite the share price dawdling over the past year (+5%), we held on to the bulk of our shares. We sold a small number of shares in the spring when the price topped $17. Investors are not giving management due consideration considering company growth and profitability in a smokin' hot industry.
The Industry is Smokin' Hot
Marijuana remains an illegal substance. Federal law classifies it as a Schedule 1 drug. By September '21, 36 states, Washington, D.C., and other territories legalized the drug for medical therapies. 18 states and D.C. allow it to some extent for recreational use. Commentators expect sales of cannabis products to exceed $30B by 2025.
The past October election saw +70% of Philadelphia vote for decriminalization. Colorado voters rejected tax increases on marijuana.
Anheuser-Busch (BUD), Altria (MO), Scotts Miracle-Gro (SMG), Constellation Brands (STZ), and Alimentation Couche-Tard (OTCPK:ANCUF) are major players with substantial investments in cannabis companies.
In July '21, Senators Schumer, Booker, and Wyden unveiled a sweeping bill to federally decriminalize marijuana. On October 11, '21, Seeking Alpha reported the Senators delivered a formal request to U.S. Attorney General Garland "to remove marijuana as a controlled substance" and "to decriminalize cannabis."
An On-target Business Plan
Cresco Labs grows strains of cannabis. It manufactures and markets under a variety of brand names. The company owns and operates 40 outlets and holds 44 licenses. It toll manufactures for other retail/wholesale operators and has a creative edibles operation. Products include cannabis flowers, vape, and disposable pens, resins and extracts, tinctures, capsules, salves, oils and patches, chocolates, toffee candies, gummies, taffy, and other sweets.
Source Seeking Alpha
The company's Quant Ranking is neutral. It is 99th out of 189 in the pharmaceuticals industry and 589th out of 994 in the healthcare sector. The overwhelming consensus among analysts is bullish but Wall Street is neutral.
Source Yahoo Finance
Price targets over the next 12 months range from $12 to $30. The consensus among analysts is a strong buy expecting the price target to be in the low $20s with an upside over 160%. Short interest is negligible.
Insiders own a hefty 20.2% of shares and lend the company money. Institutions and corporations own 3.6%. 76% are owned by the public and others.
Cresco's debt undergirds company expansion. In the world of marijuana sales, it is all about capturing territory and market share. The net debt is offset by the company's stash of $252.8M in cash. Standing against a market capitalization of $4.06B makes the debt hardly worth mentioning as a risk factor.
Regarding profit, SA points out, the company:
swung to a ~263.5M Q3 2021 loss from a ~$25.6M gain in the prior-year period due to a $291M impairment charge. That charge was related to changes in intangible assets originally ascribed to the third-party distribution business, customers, and brands, as a result of the strategic shift in California operations.
Keeping Cannabis Companies in the Shadows
Cannabis companies, licensed by states, face three barriers to their financial growth and the creation of nationwide recognition.
First, dispensaries cannot deposit cash in any bank of choice. The federal government has designated six banks in Illinois, for instance, to accept cannabis cash that 90% of the dispensaries use. Cannabis operators pay hefty fees for normal business services like payroll processing, checking, lending, and limited credit cards. Unable to process credit card payments leaves this multi-billion dollar industry exposed to risks cash-run operations face.
The federal government threatens banks with loss of charters for accepting funds gained from illegal drug sales. In April, the House passed the SAFE Banking Act to open the banking system to cannabis companies, but the bill is stuck.
The second barrier is the ban on advertising not only their products but locations of sales. Courts uphold the prohibitions limiting marketing and advertising. The companies cannot build brands like Camel and Marlboro. Cresco Labs is building its empire online.
product portfolio
Courtesy Cresco Labs Inc.
Another barrier inhibiting growth is the government requirement for dispensaries to maintain a nondescript appearance. Outdoor signage is minimal and windows blocked to limit peeking into the shops at Cresco Labs' Sunnyside retail stores.
The third barrier is traditional stock brokerage firms do not trade the ~420 cannabis companies' securities, but NASDAQ and NYSE list them. This barrier limits their growth from investment opportunities. Last week, JPMorgan Chase & Co. (NYSE:JPM) notified its prime brokerage clients it will not trade cannabis stocks due to regulatory scrutiny related to money-laundering laws and regulations.
Between October '20 and February '21, online stock trades averaged $300M per day. Trading hit $400M one day in January and $652M on Feb 10th. Online searches about cannabis stocks hit every seven-tenths of a second.
Stub of the Story
CRLBF is poised for a significant share price increase. We estimate the price will rise closer to the $30 per share estimate once the Congress and White House set the industry free. It is clear, demand for across-the-board legalization is fomenting. Cresco's products are also in demand and its wholesale business is thriving. Then there looms the chance a multinational will see the value in this vertically integrated cannabis company and make a move on it.
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