Cresco Labs is a pot industry leader, GMP says

Following the company’s second quarter results, GMP Securities analyst Robert Fagan has maintained his “Buy” rating on pot stock Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL).

On Wednesday, Cresco Labs reported its Q2 results. The company lost (US) $3.91-million on revenue of $29.9-million, a topline that was up 253 per cent over the same period last year.

“We delivered an outstanding quarter that reflects the leading positions we have established in some of the most attractive markets in the cannabis industry,” CEO Charles Bachtell said. “We are seeing accelerating revenue growth driven primarily by market share gains and strong trends in registered patients in our established markets of Illinois and Pennsylvania, as well as our expanded presence and distribution in California. As we scale our operations in our established markets, we are seeing the positive impact on gross profit margin that we projected. The higher revenue and margins helped to drive a substantial increase in Adjusted EBITDA compared to the prior quarter. While our increasing profitability demonstrates our ability to effectively execute and leverage the attractive model we have developed, we continue to operate with a long-term perspective and make investments to position Cresco Labs to lead the cannabis industry in the years to come. We are transforming the retail cannabis experience with the national rollout of our Sunnyside* dispensaries, expanding into the CBD market with the launch of our WellBeings product line, and expanding our cultivation and retail operations in Illinois to capitalize on adult-use legalization beginning in 2020. As we continue to capitalize on the strong organic growth trends in our current markets and complete our pending acquisitions of Origin House and VidaCann, we expect to deliver continued improvement in revenue and profitability, resulting in further value being created for our shareholders.”

Fagan notes that these results were above his estimates and the street consensus. He says the quarter was an unambiguous positive.

“With strong Q2 results, CL has showcased its ability to expand rapidly without sacrificing profitability, highlighting solid execution,” the analyst said. “In our view, CL’s attractive competitive positioning in key markets clearly set the company on a path to become an industry leader in wholesale and retail.”

In a research update to clients today, Fagan maintained his “Buy” rating and one-year price target of $21.50 on Cresco Labs, implying a return of 96.7 per cent at the time of publication.

The analyst thinks CL will post EBITDA of $29.0-million on revenue of $188.0-million in fiscal 2019. He expects those numbers will improve to EBITDA of $248.6-million on revenue of $734.2-million the following year.

Fagan adds that he made an adjustment regarding the company’s mergers and acquisitions activity.

“Reflecting updated M&A timeline in our forecasts. We have adjusted our forecasts to reflect slightly longer closing timeframes for CL’s pending acquisitions, which is partly offset by stronger growth assumptions in IL and PA given recent trends. This mainly impacts our 2019 forecasts, with our 2020 estimates remaining largely unchanged. In addition, in light of CL’s current cash position of $60m and anticipated requirements to complete pending M&A, we have assumed a debt financing of $50m will be completed during H2/19.”