AltaCorp Capital trims price target on Cresco Labs

According to AltaCorp Capital analyst Kenric S. Tyghe, US cannabis play Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) produced some nice surprises in its latest quarterly results, and while the overall picture looks good for the company, Tyghe has lowered his price target nonetheless.

In an update to clients on Monday, the analyst laid out the details.

One of the largest multi-state operators in the US, Chicago-headquartered Cresco is currently operating in nine states with 21 dispensaries and 18 cultivation and production facilities. The company is a market leader in Illinois and Pennsylvania and is currently expanding its presence in California, New York, Massachusetts and Ohio.

Cresco Labs released its fourth quarter and full-year 2019 results on Monday, posting Q4 revenue that was up 144 per cent year-over-year and up 14 per cent sequentially to $41.4 million and total 2019 revenue of $128.5 million, up 197 per cent from 2018. The company ended the year with a fourth quarter net loss of $45.2 million and with total assets of $616.6 million and cash and equivalents of $49.1 million. (All figures in US dollars except where noted otherwise.)

CEO Charlie Bachtell called the year a pivotal one for Cresco and said the company’s successes in Illinois and Pennsylvania show that the company is “following the right plan — going deep and focusing on getting our brand portfolio onto third-party shelves.”

“Building on our success last year, in 2020 we are focused on expanding our market-leading position in Illinois and Pennsylvania, integrating our newest assets and turning California into a center of profitable growth and building a scalable foundation in other important states. By achieving success in these focus areas, we expect to transition the Company from Adjusted EBITDA positive to cashflow positive progressively through the year,” Bachtell said in a press release.

For his part, Tyghe said the Q4 revenue of $41.4 million came in light compared to his $43.3 million estimate and the consensus $44.0 million, with the analyst chalking the miss up to Cresco’s narrowing of its focus on driving profitability in California, which ended up with Cresco delisting some of its unprofitable brands.

At the same time, Tyghe was impressed by the company’s EBITDA which came in at $2.9 million versus his $2.7 million estimate and the Street’s $1.2 million, where gross margins grew to 51.1 per cent. The analyst said he expects further cost synergies as Cresco continues to hammer away at disciplined execution in California and other key markets.

At the same time, Tyghe lowered his forecast, citing a number of reasons, including lighter than expected Q1 2020 revenue guidance ($66.5 million) likely, Tyghe says, due to capacity constraints in places like Illinois; the delisting of brands in California and an incorrect assessment of the impact of acquisition Origin House on CL’s revenue; and the termination of the Tryke acquisition.

With the update, Tyghe reaffirmed his “Outperform” rating but dropped his target from C$12.00 to C$11.00, which at press time translated into a projected 12-month return of 79 per cent.

“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 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,” the analyst concluded.