Cresco Labs is still undervalued, Stifel says

Stifel GMP analyst Robert Fagan delivered an update to clients Friday on US multi-state cannabis company Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL), saying Creco’s top and bottom lines will likely see lots of growth over the second half of 2020.

Chicago-headquartered Cresco is a vertically-integrated cannabis business with operations in nine states including 21 dispensaries and 18 cultivation and processing facilities. The company is one of the largest MSOs in the US, with a strong presence in its home state of Illinois and in Pennsylvania, while it is currently growing its position in the key states of California, New York, Massachusetts and Ohio.

In his report, Fagan provided a synopsis culled from a recent series of virtual investor meetings Stifel GMP hosted with Cresco’s CEO Charlie Bachtell. In a nutshell, Fagan said Cresco is well-positioned for accelerating growth over H2 of this year while growth trends for this year’s second quarter could be more subdued.

In the meetings, Bachtell said consumer demand has been strong throughout the COVID-19 pandemic, with the main hurdle being supply constraints, although accommodations have been made for social distancing regulations through practices such as curbside pickup, more restricted retail environments and a rise in digital ordering.

Bachtell indicated Cresco’s capital allocation will be focused on adding depth to existing platforms rather than in pursuit of larger M&A activity, with the company looking at bolt-on acquisitions in states such as Arizona, Pennsylvania, Michigan and California.

“Cresco reiterated its expectations for its large capacity expansions (Illinois and Pennsylvania) to ramp up gradually over Q3/2020, significantly augmenting supply for Q4/2020 and reaching optimal scale entering Q1/2021,” Fagan said. “Hence, with strong demand in IL and PA likely to keep state inventory levels low, Cresco should be well positioned to leverage its installed base to drive robust growth through H2/2020. This said, CL highlighted the large scale of added capacity was requiring further workforce investment, suggesting some short-term margin impact.”

On the whole, Fagan judged management’s comments via the investor meetings as “largely neutral,” as the outlook was in line with his forecasts.

“We expect mid-teens sales growth for CL in Q2/2020 and for EBITDA to remain in the single-digit million range, which we believe aligns well with the company’s comments around Q2 COVID impact. However, with a combination of rising capacity to service excess demand, yield enhancements and potential M&A to add depth at retail, CL should be well positioned to accelerate its sales and profitability growth through H2/2020, in line with our current expectations,” Fagan wrote.

With the report, the analyst maintained his “Buy” rating and C$13.00 target for Cresco, which at press time translated to a projected 12-month return of 130 per cent.

Cresco’ share price fell with the cannabis industry over much of 2019, while the stock has been moving higher over the past three months. For 2020, CL is currently down 38 per cent.