“We believe Cresco ranks high relative to other multi-state operators in its management strength, branded products wholesale strategy and quick execution of its infrastructure buildout,” says Zandberg, whose target price for Cresco is set at C$23.00, representing a projected return of 37.7 per cent at the time of publication.
Cresco, which has cannabis operations across eleven states, produces in-house cannabis brands which it sells via its dispensaries and through wholesale. The company recently announced the acquisition of California’s largest distributor network in Origin House, which, Zandberg points out, puts Cresco’s distribution at over 725 dispensaries in the US, with 500 in California alone.
“Revenue growth is driven by both dispensary sales as well as its wholesale revenue for branded product sold in third-party dispensaries. We believe this approach will drive superior growth relative to some other MSOs. Cresco’s reported EBITDA margins of 44 per cent in its recent quarterly financial disclosure (Q3 FY18). This margin is the second highest of any of the US multi-state operators reported to date,” he writes.
The analyst sees Cresco’s revenue going from $42.9 million in fiscal 2018 to $335.4 million in fiscal 2019 to $774.9 million in fiscal 2020 and sees its EBITDA going from $10.2 million in fiscal 2018 to $77.3 million in fiscal 2019 to $227.2 million in fiscal 2020.
Zandberg says trading multiples for US cannabis companies are likely to increase over the next 12 months as more capital flows in the sector, effectively eliminating the discount at which US companies currently stand vis a vis their Canadian peers.
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