Cresco Labs has more upside, says ATB Capital

ATB Capital Markets analyst Kenric Tyghe is staying bullish on US cannabis company Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) ahead of second quarter earnings.

In an update to clients on Monday, Tyghe reiterated his “Outperform” rating and one-year price target of C$11.00, which at press time represented a projected return of 15.0 per cent.

Chicago-based Cresco is a CPG-focused cannabis business with vertically integrated operations across nine states in the US including 21 dispensaries and 18 cultivation and processing facilities.

The multi-state operator has a large presence in its home state of Illinois along with in Pennsylvania, with expanding operations in California, Nevada, Arizona and New York. Cresco targets the wholesale market, which currently accounts for about 70 per cent of its overall sales.

Set to report its Q2 2020 results on Thursday after market close, Cresco’s first quarter results in May saw record revenue of $66.4 million, a 60-per-cent sequential growth rate which the company said was driven by better cultivation and retail efficiencies in its Illinois and Pennsylvania operations along with improvements in California.

Adjusted EBITDA came in at a loss of $3.2 million, up 11 per cent year-over-year. (All figures in US dollars except where indicated otherwise.)

For the upcoming Q2, Tyghe has lowered his estimates due to the impact of COVID-19 which he sees as having influenced market dynamics in the sector. The analyst is calling for $83.3 million in revenue (previously $90.2 million) and adjusted EBITDA of $9.6 million (previously $15.5 million). Both are above the current consensus average, Tyghe said.

“We believe that Cresco is well positioned to capitalize on current market dynamics, given both its footprint and the ramp of recent material capacity expansion, which supports our continued positive bias. We believe that Cresco’s absolute and relative positioning and execution supports a premium valuation, which on the recent re-rating of the leading MSOs, supports an increase in our target multiple to 18.0x (previously 15.0x),” Tyghe wrote.

“The revision to both our revenue and gross margin estimates reflect (i) a more limited than initially expected market share recovery in Illinois on revisions to our assumptions on the in-quarter benefit from the ramp of recently completed capacity expansions, and (ii) a more pronounced drag than initially expected from the various stay at home and related orders in key markets,” Tyghe wrote.

On the Illinois market, Tyghe said the impact of the stay-at-home environment will be a factor, as it has in other markets, even as Illinois has recently had a greater-than-average growth rate.

For the 2020 fiscal year, Tyghe is forecasting revenue of $373.8 million and adjusted EBITDA of $55.1 million, and for 2021, he is calling for revenue of $657.7 million and $162.8 million, respectively.

Earlier this month, Cresco announced the opening of its ninth dispensary in Illinois, Sunnyside Schaumburg, adding to its position as the largest retailer by footprint in the state. The company said its retail share of the adult-use market has almost doubled since January.