US cannabis name Cresco Labs (Cresco Labs Stock Quote, Chart, News CSE:CL) just go a rating upgrade from Echelon Capital Markets on the back of strong second quarter results.
In an update to clients Friday, analyst Andrew Semple said the company risk profile has improved while the quarterly results beat his estimates.
Chicago-based Cresco is a cannabis consumer packaged goods company and one of the largest multi-state operators in the US. Cresco has operations across nine states including 21 dispensaries and 18 cultivation and processing facilities, with a large presence in Illinois and Pennsylvania and expanding businesses in California, Nevada, Arizona and New York.
The company reported Q2 revenue of $94.3 million, up from $29.9 million a year ago and from $66.4 million for the previous quarter, and adjusted EBITDA of $16.5 million, up 419 per cent from the previous quarter. (All figures in US dollars except where noted otherwise.)
Co-founder and CEO Charles Bachtell said Cresco is beginning to see the fruits of its labours over previous quarters and through its expansion and scaling efforts.
“We grew revenue in every single one of our U.S. markets sequentially by more than 30 per cent, with the exception of Massachusetts, where adult use was halted for part of the quarter,” said Bachtell in a press release. “Cresco Labs is the largest wholesaler of branded cannabis products with nearly $55 million in revenue and our Sunnyside retail strategy is outperforming with $39 million generated from our 17 locations. We are accelerating growth and beginning to generate substantial leverage as we scale our
operations and benefit from the investments we’ve made over the past 12 months.”
Cresco’s Q2 revenue of $94.3 million was better than Semple’s $73.8-million forecast as well as the $76.9-million consensus estimate and CL’s $16.5-million EBITDA was much better than Semple’s $3.5-million forecast and the Street’s $5.6 million.
Semple said Cresco’s Illinois and Pennsylvania assets continue to produce outstanding results with a faster profitability ramp still to come, while its California business gained market share over the quarter and grew its sales at a 41 per cent clip sequentially.
“We are upgrading our rating to Buy (previously Speculative Buy) and raising our target price to C$10.50 per share (previously C$9.50 per share). Upfront, we note that our rating change reflects a shift in the Company’s risk profile as Cresco significantly improved its capital situation, moved solidly into positive EBITDA territory, concluded all pending major M&A transactions, and made significant progress in integrating California into the portfolio. Our target price upgrade is attributable to positive estimate revisions,” Semple wrote.
Looking ahead, Semple said Cresco’s third quarter should result in 20 per cent growth as momentum continues across the company’s key markets. The analyst has revised his estimates higher for the rest of 2020 and for 2021.
His Q3 sales/gross margin/EBITDA estimates move to $115.6 million, 50 per cent and $23.3 million, respectively, compared to $92.1 million, 49.5 per cent and $10.4 million, respectively.
“This is driven primarily by an accelerated wholesale growth trajectory, with production capacity having been delivered somewhat earlier than expected in Q220. Our forecasts for the retail segment also improve but those changes are more modest compared to our improved outlook for the wholesale business. Following our estimate revisions, we no longer expect revenue growth to accelerate into Q420, given the already impressive growth achieved in Q2 and expected for Q3,” Semple wrote.
At press time, Semple’s new target of C$10.50 represented a projected 12-month return of 12.2 per cent.