Cresco Labs keeps “Buy” rating at Stifel Canada

It’s steady as she goes for US cannabis operation Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL), according to Stifel GMP analyst Robert Fagan, who reviewed Cresco’s latest quarter in an update to clients on May 28.

Fagan said there may be a bump ahead from store closures in Massachusetts but Cresco’s overall expansion efforts are proceeding according to plan.

Chicago-based Cresco, one of the largest vertically-integrated multi-state operators in the US, announced its Q1 2020 ended March 31 results last Thursday. The company registered $66.4 million in revenue, up 60 per cent year-over-year, and adjusted EBITDA of $3.2 million, up 11 per cent year-over-year. (All figures in US dollars.)

In its commentary, management highlighted the company’s revenue growth on the same asset base as the previous quarter and its fourth-in-a-row quarter of positive adjusted EBITDA.

CEO Charles Bachtell said Cresco’s major capex investments are now behind it, with 2020 looking to be a year of delivering on substantial growth.

“In Q1 we built, staffed, integrated, and refined our operations in the largest and most important cannabis markets in the US,” said Bachtell in the press release. “This positions us incredibly well to see the fruits of that labor in the coming quarters. We continue with our very clear focus, having the most strategic geographic footprint possible and gaining meaningful, material positions in those markets.”

As for Fagan, his Q1 revenue projection was a fair match with Cresco’s $66.4 million at $65.5 million, as the company had offered prior guidance on the top line. Adjusted EBITDA of negative $707,000 was lower than the analyst’s call for positive $384,000.

Fagan said Cresco is now moving into the pole position in the emerging and very hot Illinois market, having made good progress by recently opening two new rec cannabis stores, thus bringing its count to seven, a tie for the top retailer in the state with Green Thumb Industries.

“We note both stores are ideally located, with the Danville store an hour’s drive from Indianapolis (pop. 900k), and River North the only store in central Chicago. Hence, we believe these should be high productivity stores for CL with sales potential of $15–25m/year (~50 per cent above average) once supply constraints relax. In addition, with IL facility expansions to 215k sq. ft. now completed (state largest), CL’s capacity should ramp-up ahead of most peers, likely facilitating sizeable wholesale market share capture. Given the above, we view CL positioned as the current leader in IL,” Fagan wrote.

The analyst deemed Cresco’s integration of Origin House as going well, with strong performance from OH especially in the slower growth market of California. As for Cresco’s business in Michigan and Ohio, Fagan should have solid platforms in both states going into 2021.

Looking ahead, Fagan said, “After high 26 per cent organic growth in Q1, CL’s Q2 growth could slow somewhat with store closures in MA. However with large capacity expansions coming on-line in H2 (IL & PA), improved retail positioning, and better margin trends in CA, we view CL’s growth outlook as steadily on track.”

With the update, Fagan has reiterated his “Buy” rating and C$13.00 target for the stock, which at press time represented a projected return of 94.6 per cent.