Cresco Labs reported a solid quarter when focusing on adjusted EBITDA margin expansion.
The MSO remains primed for any long-term move to a branded wholesale cannabis market.
The stock trades at an insanely cheap multiple of 11x '22 adjusted EBITDA targets while the opportunity remains massive.
The MSO (multi-state operator) space finally saw a relieve rally to end last week. Cresco Labs (OTCQX:CRLBF) continues to be the best way to invest in the wholesale market in a world where branded cannabis becomes the focus over running cultivation facilities and retail stores. My investment thesis remains very Bullish on the MSO space with a preference to own a basket of stocks such as Cresco Labs.
Decent Quarter
As previously reported by other leading MSO players, the September quarter was tougher than normal. The U.S. cannabis space didn't see sequential revenue growth as New York delayed medical cannabis flower sales and states like Pennsylvania and Florida were more price competitive.
Cresco Labs still reported Q3'21 revenue grew 2.6% sequentially to reach $215.5 million. The company only grew revenues 40.6% YoY for some of the lowest reported growth rates in the MSO space.
The numbers were partially deflated from shifting away from distributed wholesale sales in California. The MSO might've seen revenue growth dip, but EBITDA margins surged 220 basis points in the quarter. The company pushing for more profitable sales will ultimately be rewarded by the market.
For the quarter, Cresco Labs grew adjusted EBITDA sequentially by 24% to $56.4 million. A lot of these MSO have plenty of levers to pull in order to boost margins in the short term. In the case of Cresco Labs, the company simply needed to exit low margin distribution sales agreements in California to focus on higher margin branded sales.
As with most MSOs, the December quarter and 2022 are expected to generate far more growth. Whether due to acquisitions or the expansion of cannabis sales in both New York and New Jersey, sales should return to solid growth rates.
The addition of the Cultivate business in Massachusetts along with the growing store base in Florida, Cresco Labs forecasts a big boost in Q4'21 sales. The MSO now forecasts sales of $240 million, up nearly $25 million sequentially.
The sales boost comes as the company will likely lose several million dollars in wholesale distribution revenues in California. The forecast for Q4'21 adjusted EBITDA margins to reach 30% is another sign of the low margin revenues obtained in the Origin House transaction where Cresco Labs took a $290 million impairment charge.
The company will have to boost adjusted EBITDA margins another 380 basis points to reach the 30% clip. Just on the Q3'21 revenue base, these higher margins would generate another $8.2 million in adjusted EBITDA.
All About Valuation
As with most of the MSOs, the valuation on Cresco Labs is absurdly low for the opportunity. The MSO is a strong wholesale player with leading positions in states such as Illinois and Pennsylvania. The Cultivate deal gives Cresco Labs another state with a strong wholesale position.
For the quarter, wholesale revenues were $109.3 million placing the company with over 50% of revenues from the wholesale market. The MSO only had 37 open retail stores leaving the company with the smallest store base of the major MSOs.
The Republican led cannabis bill released today would appear to favor a wholesale focused company where interstate cannabis sales allow for easy transition into other states. The Rep. Nancy Mace (R-SC) sponsored bill won't likely obtain approval, but the States Reform Act does push forward the cannabis agenda with collaboration from both sides of the aisle.
The company lists 421 million shares outstanding heading into Q4'21 where the deals for Cure Penn and Laurel Harvest will boost the share count while the Blair Wellness deal appears all cash and debt. The stock has a market cap of only $4.0 billion before these deals close while adjusted EBITDA reached $56.4 million in the quarter. The path to 30% EBITDA margins underscores the incredible valuation gap here.
Even at the current EBITDA run rate, Cresco Labs trades at a massive discount to growth rates. The adjusted EBITDA hit $226 million in the quarter and the stock only trades at 18x these estimates.
Assuming the company hits the $1.2 billion consensus revenue estimates for 2022, the stock trades at 11x 2022 EBITDA targets. This incredible valuation assumes just a 30% EBITDA margin while competitors have achieved higher levels. The revenue growth could accelerate with any progress in the future $5 billion New York cannabis market where sales have been minimal up until the approval of medical whole flower sales in early October.
Cresco Labs does already have a net debt position of $123.8 million, so the risks do exist. As parts of these outstanding acquisitions are paid for in cash, the MSO will increase the net debt position.
Takeaway
The key investor takeaway is that Cresco Labs remains the best way to play a future market focused on branded wholesales cannabis sales. For now, the market is still mostly focused on owned retail dispensaries, so this MSO could struggle in comparison without any changes to the market from federal legalization. As with most of the MSOs, the stock has risk due to changing market dynamics, but Cresco Labs is far too cheap for the likely risk to the U.S. cannabis market.
Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.
Stone Fox Capital launched the Out Fox The Street MarketPlace service in August 2020.
Invest with Stone Fox Capital's model Net Payout Yields portfolio on Interactive Advisors as he makes real time trades. The site allows followers to duplicate the model portfolio in their own brokerage accounts. You can find the portfolio and more details here:
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Follow Mark on twitter: @stonefoxcapital Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
“The Sentence of Michael Thompson” trailer earned a Silver Clio for creative excellence in film/video
CHICAGO--(BUSINESS WIRE)-- Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco Labs” or “the Company”), a vertically integrated multistate operator and the number one U.S. wholesaler of branded cannabis products, today announced “The Sentence of Michael Thompson” documentary trailer earned a Silver Clio for Film & Video from the Clio Cannabis Awards. In addition, the Discover Some Wonder podcast series from the Company’s Wonder Wellness cannabis brand and the #Wayto420 campaign from its Sunnyside retail brand were shortlisted for Digital & Mobile and Public Relations creative excellence, respectively.
“The Sentence of Michael Thompson” documentary trailer earned a Silver Clio from the 2021 Clio Cannabis Awards, the most prestigious program honoring marketing & communications work. (Graphic: Business Wire) “The Sentence of Michael Thompson” documentary trailer earned a Silver Clio from the 2021 Clio Cannabis Awards, the most prestigious program honoring marketing & communications work. (Graphic: Business Wire)
Expanding on Clio’s longstanding reputation for establishing best-in-class programs honoring creative excellence in a variety of specialized verticals, the Clio Cannabis Awards—now in its third year—honors work and talent that builds a greater understanding of a rapidly growing industry.
“It is an honor for our efforts to be recognized for the second consecutive year by such a prestigious platform. Top recognition for ‘The Sentence of Michael Thompson’ is very special because social equity and social justice are core to the company’s mission, and the film aims to help people truly understand the gravity of the impact of injustice on the lives of people adversely impacted by The War on Drugs,” said Cory Rothschild, SVP of Marketing.
Chima Enyia, EVP of SEED, added, “We appreciate all those involved—Michael Thompson, his family, restorative justice partners and our staff—in the making of this film. More than 40,000 Americans remain in prison for cannabis offenses, and there is much more work to do to right the wrongs of The War on Drugs. We are laser-focused on leveraging our platform and influence to drive awareness of Michael’s story to ensure conversations about legalization address pardoning those currently incarcerated for cannabis offenses and social equity in the cannabis industry.”
On Juneteenth, Cresco released the trailer for “The Sentence of Michael Thompson”, a documentary short film about the story of Michigan’s longest-serving non-violent offender. Granted clemency this past January, Thompson was serving a 60-year sentence in Muskegon Correctional Facility in Michigan for selling 3 pounds of cannabis to a police informant in 1994. The trailer earned the Silver Clio for Film & Video. The documentary will be released in 2022.
Launched in August for National Wellness Month, Wonder Wellness created a one-of-a-kind audio collection designed to help listeners Focus, Relax, Laugh or Sleep, the experiences delivered by its gummy and minis products. The Discover Some Wonder initiative was named a shortlist winner for Digital & Mobile.
Timed with this year’s 420 holiday, Sunnyside released the results of a nationwide survey that demonstrated shifting beliefs and behaviors surrounding cannabis use and translated them into approachable messages about the plant’s functional benefits for every type of consumer. The #Wayto420 campaign was shortlisted in the Public Relations category.
To view the full gallery of winning work, visit www.cliocannabisawards.com.
About Cresco Labs Inc.
Cresco Labs is one of the largest vertically integrated multistate cannabis operators in the United States, with a mission to normalize and professionalize the cannabis industry. Employing a consumer-packaged goods (“CPG”) approach, Cresco Labs is the largest wholesaler of branded cannabis products in the U.S. Its brands are designed to meet the needs of all consumer segments and comprised of some of the most recognized and trusted national brands including Cresco, High Supply, Mindy's Edibles, Good News, Remedi, Wonder Wellness Co. and FloraCal Farms. Sunnyside, Cresco Labs’ national dispensary brand, is a wellness-focused retailer created to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco Labs operates the industry’s largest Social Equity and Educational Development initiative, SEED, which was established to ensure that all members of society have the skills, knowledge and opportunity to work and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.
Forward Looking Statements
This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the Company’s Annual Information Form for the year ended December 31, 2020 filed on March 26, 2021, and other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Labs’ shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.
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