AltaCorp Capital cuts target price on Cresco Labs

Supply constraints in key states are going to hinder progress for US cannabis name Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL), says AltaCorp Capital analyst Kenric S. Tyghe, who delivered a corporate update to clients Thursday.

Tyghe kept his “Outperform” rating but dropped his target price from C$13.50 to C$12.00, which at press time represented a projected 12-month return of 182 per cent.

Chicago-headquartered Cresco Labs currently operates in nine states with over 20 dispensaries and 18 cultivation and production facilities. The company has the bulk of its focus on the wholesale market which currently accounts for 70 per cent of sales.

The company on Thursday announced the completion of its expansion plans for a cultivation facility in Lincoln, Illinois, along with the completion of Phase One of a planned facility in Kankakee, Illinois, together bringing its total cultivation footprint in the state to 215,000 sq ft.

Tyghe said the expanded facilities will help Cresco ease the supply constraints in Illinois which have developed since it opened its adult-use market this past January, the first state to do so by legislative decision rather than through ballot initiatives, but he insisted that despite the additional capacity, the broader market in the state “will remain more supply constrained in year than we initially expected.”

In fact, Tyghe said he is now “taking a chainsaw rather than a scalpel” to his market size estimates both in Illinois and Pennsylvania, Cresco’s other main digs, saying the current COVID-19 crisis and its related impacts have only served to compound the problem. For the numbers, the analyst sees Illinois’ 2020 market size drop from $923 million to $696 million and for Pennsylvania’s to end up at $302 million rather than the previous assumption of $535 million.

At the same time, Tyghe still sees growth ahead for Cresco.

“While we are mindful of the impact of continued supply constraints in key markets on the near term growth trajectory of those markets, we believe that Cresco (given its recent capacity expansion) is well positioned to capitalize on current market dynamics, supporting our continued positive bias. We believe that Cresco’s absolute and relative positioning, combined with its solid execution, supports a premium valuation,” Tyghe said.

As for the US cannabis sector as a whole, Tyghe said growth in the fledgling sector is likely to be slower than previously assumed, adding risks to investments in the space.

“Although we are comforted by the general demand for cannabis and cannabis-related products in the US, it remains difficult to forecast how much of that spending will be derived through the illicit market versus the legal channels. Moreover, any additional and unforeseeable restrictive legislation may impair the industry’s overall growth trajectory,” he wrote.

The analyst has dropped his revenue estimates for CL from $588.6 million to $494.4 million for 2020 and from $897.6 million to $814.2 million for 2021. Tyghe has also scaled back his EBITDA estimates, dropping 2020’s forecast from $142.8 million to $89.1 million and 2021’s forecast from $246.4 million to $213.9 million. (All figures in US dollars unless where noted otherwise.)