The recent selloff in the US cannabis space should make for a timely entry point for investing in Cresco Labs (Cresco Labs Stock Quote, Chart, New CSE:CL).
That’s according to analyst Matthew Pallotta of Echelon Wealth Partners, who on Monday initiated coverage of Cresco with a “Speculative Buy” rating and C$15.00 target price, which represents a projected 12-month return of 48 per cent at the time of publication.
Chicago-based Cresco currently has operations across 11 states with a focus on product manufacturing, branding and distribution while also having a retail and cultivation presence. Cresco launched in July its new brand Sunnyside, aimed at wellness, education and customer service within the cannabis space.
Pallotta says Cresco is positioned to be a leader in the US cannabis space, with 26 retail dispensaries in operation, 17 cultivation and processing sites either in operation or under construction and a market presence that reaches over 150 million Americans, accounting for about two-thirds of the addressable US market…
Pallotta says that multi-state operator Cresco is positioned to be a leader in the US cannabis space, with 26 retail dispensaries in operation, 17 cultivation and processing sites either in operation or under construction and a market presence that reaches over 150 million Americans, accounting for about two-thirds of the addressable US market.
“Cresco has been able to achieve leading market share in both its home state of Illinois (28 per cent) and Pennsylvania (30 per cent) (per management), where its operations are most established,” writes Pallotta. “We believe this reflects its effectiveness in winning distribution, and in combination with the Company’s significant investments in its brand portfolio, suggest it should win outsized share in markets in which it is currently operating and ramping up.”
The analyst also points to the adult-use market in Cresco’s home state of Illinois, where rec sales are starting in January 2020, saying that these should be a material tailwind for the company going forward. Pallotta thinks that the company will maintain its leading share of the state market (where total sales are expected to surpass $1 billion in the coming years), while also being well-positioned to take advantage of the expected supply shortages in the early days of rec cannabis in Illinois, through its three production facilities and up to ten licensed adult-use dispensaries.
Moreover, Pallotta says that the downturn in US cannabis stocks over the past few months should be noted, as his target price for Cresco is where the stock traded in late May.
“Commensurate with our bullish stance on the US cannabis sector more generally, we view the sharp pullback in the Company’s stock, along with that of its US MSO peers, to be an opportune time to establish a position in what we view to be one of the best US cannabis operators in the industry. At these levels, we view Cresco Labs as a compelling investment opportunity,” writes Pallotta.
The analyst thinks that Cresco will generate 2019 revenue and adjusted EBITDA of $186.7 million and $7.5 million, respectively, and 2020 revenue and adjusted EBITDA of $634.8 million and $137 million, respectively. (All figures in US dollars unless noted otherwise.)