Cresco Labs has price target cut at Stifel

A softer than expected cannabis market in California means a slightly dimmer 2020 forecast for US multi-state operator Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL).

That’s according to Stifel Canada analyst Robert Fagan who provided an update to clients on Cresco on Wednesday, dropping his target price on the stock from $20.00 to $16.00.

Cresco stock is still a buy, however, as Fagan predicted a California rebound over the second half of the year along with strong growth for the company going into 2021.

Chicago-headquartered cannabis CPG company Cresco has interests in 11 states including 21 dispensaries and licenses for an additional ten. The company provided on Thursday an update on its response to the COVID-19 pandemic, saying its cultivation and production operations will continue but “with elevated sanitation, quality and safety programs.”

As for its retail outlets, the company will continue operating during regular hours “to ensure that the tens of thousands of patients and consumers that rely on its cannabis products for their daily wellness and quality of life continue to have access to them.”

“Many of our dispensaries are classified in the same category as pharmacies that people depend on as trusted access points for prescription medicine and continuing to provide that access is a fundamental responsibility. We have always viewed ourselves as responsible stewards of this industry first and foremost – we fundamentally embrace our role as leaders in creating sustainable state programs within which we operate,” said Charlie Bachtell, CEO and Co-Founder, in the press release.

Fagan said he expects CL’s upcoming fourth quarter 2019 earnings report should be in line with similar metrics as its Q3, with the analyst calling for sales driven by good organic growth in the core states of Illinois and Pennsylvania and partly offset by likely weaker sales in California, where the company’s platform has the highest coverage of any company in Fagan’s equities coverage universe.

That softness combined with reductions in Nevada and New York push the analyst’s 2020 sales forecast to $472 million from $642 million prior. And with a lower operating scale now projected for recently-closed acquisition Origin House, Fagan’s 2020 EBITDA estimate dropped from $205 million previously to $80 million.

At the same time, Fagan said he is optimistic on Cresco going forward.

“As operations ramp up in 2020 across key growth states (IL, PA, MA, AZ), we expect CL’s platform to enter 2021 at full scale, generating strong growth in sales forecasted to reach $845 million. We project this to be driven by solid market share of ~15%–20% in IL due to CL’s relative scale advantage, strong rebound in growth for Origin House in CA and Tryke in NV alongside our state-level forecasts, and sizable growth contributions from PA, MA and AZ as well,” the analyst said.

Fagan said that following recent funding activities, Cresco is now one of the best-capitalized operators in the industry with an estimated pro-forma liquidity of about $270-million excluding capex.

“In our view, this gives CL solid positioning to execute on our $845 million 2021 sales forecast, representing the second largest projected revenue base across all public US operators (after CURA) and highlighting the robust outlook supported by CL’s platform,” said Fagan. “Hence, we maintain our BUY, but lower target to C$16 based on 17.5x our 2021 EBITDA of $255 million versus 20x our 2020 EBITDA of $205 million prior.”

Fagan’s new C$16.00 target at press time represented a projected return of 374.8 per cent.